The Different Methods of Inventory Control: A Comprehensive Guide

Explore effective inventory control methods. Click here to learn strategies for optimized stock management in this comprehensive guide.

Last Updated on January 5, 2024 by Ossian Muscad

Inventory control is vital to your success when running a business that involves multichannel retailing, wholesale, or e-commerce. It ensures that your company’s inventory is managed efficiently and effectively, ultimately increasing profitability. Understanding the different methods of inventory control is crucial in optimizing your inventory management system.

But what exactly is inventory control, and why should you consider it a priority in your business operations? This guide will explore the different methods and explain their benefits and drawbacks. We will also discuss the importance of inventory control and how to overcome some associated challenges.

 

What is Inventory Control?

Inventory control is the process of tracking and managing inventory. This includes the ordering, shipping, and receiving of inventory and storage and disposal of inventory. Inventory control monitors the movement and storage of inventory to ensure that inventory levels are maintained at an optimal level. This process is essential as inventory management can significantly affect a company’s success.

The goal of inventory control is to minimize the cost of inventory while maximizing inventory turnover. In other words, inventory control strives to find the perfect balance between having too much and insufficient inventory. This delicate balance can be challenging to achieve, but with the right methods, it is achievable.

 

Inventory Control Vs. Inventory Management: What’s the Difference?

It’s important to note that inventory control and management are different. While they are closely related and can even be used interchangeably, they have distinct differences worth noting. The following factors differentiate inventory control from inventory management:

Scope

  • Inventory Control: Inventory currently available in the warehouse.
  • Inventory Management: Raw materials and finished goods throughout the entire production lifecycle

Goal

  • Inventory Control: Ensuring warehouse stocks sufficient and in optimal condition
  • Inventory Management: Having sufficient quantity of the right inventory in place at the right time

Areas of Concern

  • Inventory Control: What items are currently in the inventory? What are the locations of items in the warehouse? What’s the current status and condition of these items?
  • Inventory Management: Which items should you consider ordering? How many items need ordering? When is the right time to order these items?

Actions

  • Inventory Control: Transporting, receiving, and storing inventory; Inspecting stock items for their quality issues, expiry dates, and other possible concerns
  • Inventory Management: Making accurate predictions on customer demands based on previous records; Managing inventory items in the supply chain and reordering them when needed.

 

Types of Inventory Control Systems

There are two main inventory control systems: periodic and perpetual systems. Both methods have advantages and disadvantages, and their choice largely depends on your business needs. Choosing the right inventory control system for your business will depend on various factors, such as the type of business, the inventory size, and the inventory turnover frequency. Outlined below are the two methods of inventory control and how they work:

Periodic Inventory Control

The Periodic inventory control method involves physical inventory counts at specific intervals – these can be monthly, quarterly, or annually. This method requires shutting down the warehouse or store for a short time to perform the ‘stock take,’ during which every item in the inventory is counted and its value is recorded. This method is simpler and less costly than other inventory control methods, but it may not provide the most accurate information due to the gaps between inventory counts.

Pros

  • Less time-consuming as it doesn’t require constant monitoring.
  • Simpler to implement and operate.
  • Less expensive as it doesn’t require sophisticated software.

Cons

  • Inventory levels are not updated in real-time, resulting in potential stock-outs or overstock.
  • Requires shutting down operations for the stock take, which may disrupt business.
  • Less accurate due to the potential for human error during the stock take.

Best for:

  • Small businesses with limited inventory.
  • Businesses with non-perishable inventory.
  • Businesses where inventory levels don’t fluctuate drastically between counts.

Perpetual Inventory Control

The perpetual inventory control method leverages technology to update inventory levels constantly in real-time. This method relies on barcoding or Radio Frequency Identification (RFID) technology to update inventory records automatically whenever an item is received or sold. While it can be more expensive due to the need for sophisticated inventory management software, the Perpetual inventory control method provides a more accurate and real-time view of inventory levels, helping to prevent stock-outs or overstock situations.

Pros

  • Provides real-time updates of inventory levels, enabling better decision-making.
  • Reduces the risk of stock-outs or overstock situations.
  • Eliminates the need for physical stock takes, saving time and avoiding disruptions.

Cons

  • Can be expensive due to the need for sophisticated inventory management software.
  • Requires training for staff to operate the inventory management system effectively.
  • Technological failures can lead to inaccuracies and disruptions.

Best for:

  • Larger businesses with a high volume of inventory.
  • Businesses with perishable inventory where stock levels need to be closely monitored.
  • Businesses where inventory levels fluctuate rapidly.

 

Methods and Techniques of Inventory Control

Various methods and techniques are utilized to control inventory effectively. The four notable inventory control methods include ABC analysis; Last In, First Out (LIFO) and First In, First Out (FIFO); batch tracking; and safety stock.

These techniques, each with unique advantages, cater to various business sizes, inventory types, and operational needs. Let’s delve into each of these inventory control methods to help you identify the most suitable one for your business:

ABC Analysis

ABC analysis is an inventory categorization method that sorts stocks based on their significance, value, and sales volume. It divides inventory into three core categories:

  • Class’ A’ items are the top priority and should be given the most attention.
  • Class’ B’ items are important but not to the same degree as A items.
  • Class’ C’ items are the least important and are given the least attention.

 

Applying ABC analysis can help inventory managers focus on the items that impact the business most. At the same time, they can ensure that enough resources are dedicated to maintaining a steady flow of top-selling items.

Last In, First Out (LIFO) and First In First Out (FIFO)

Both LIFO and FIFO are inventory control techniques that organize how inventory items are moved in and out of the warehouse or store. LIFO involves selling the most recently acquired items first, while FIFO consists of selling the oldest items in stock first.

LIFO is an inventory management technique where the most recently produced or acquired items are sold first. This method assumes that the last items added to the inventory are the first ones to be dispatched or sold. LIFO is beneficial in times of rising prices, where it can lead to tax advantages by inflating the cost of goods sold and reducing taxable income.

On the other hand, FIFO is an inventory management method where the oldest items in stock (those purchased or produced first) are sold first. This strategy is beneficial for businesses dealing with perishable goods as it helps reduce the occurrence of spoilage. FIFO can lead to higher taxable income during inflation, as lower-priced items are sold first, resulting in higher ending inventory costs. 

Batch Tracking

Batch tracking is an inventory management method in which inventory is grouped into “batches,” each batch is given a unique identifier. This identifier can be a barcode, lot number, or serial number. Batch tracking allows warehouse managers to keep track of the following information:

  • Where do the items come from
  • Where the goods are heading
  • When the items expire

 

By keeping a record of this information, warehouse managers can easily trace the source of any problems or issues with the inventory. This method is particularly useful for businesses that deal with perishable goods, such as food and pharmaceuticals.

Safety Stock

Safety stock is inventory that is kept on hand to meet customer demand in the event of an unforeseen interruption in the supply chain. It can cover inventory shortages, unexpected increases in customer demand, and other unforeseen events.

Maintaining safe stock can help businesses avoid stock-outs and lost sales. However, carrying too much safety stock can tie up working capital and lead to inventory management issues. That’s why it’s essential to analyze and determine the appropriate level of safety stock for your business.

 

Tips to Get Started with Inventory Control

Inventory control is integral to any business, ensuring optimal stock levels, reducing costs, and enhancing customer satisfaction. Effective inventory management requires strategic planning, implementation, and regular reviews and updates. Here are some actionable tips to kick-start your inventory control system:

  1. Create an Inventory Control Plan: A well-structured plan defines the procedures for managing, controlling, and tracking inventory. It also outlines the roles and responsibilities of the inventory management team.
  2. Put the Plan to Practice: Implementing the plan effectively is equally crucial. Regular monitoring and updating as per the business requirements are essential.
  3. Label Products with Consistency: Consistent labeling of products reduces confusion and makes tracking easier. It could be in the form of barcodes, serial numbers, or Radio Frequency Identification (RFID) tags.
  4. Determine Reorder Points: Identifying the reorder points for each item prevents stock-outs and overstock situations. It’s typically calculated based on lead time and average daily sales rate.
  5. Make Sure Critical Items are Always in Stock: Always maintain a safety stock level for high-priority items. This way, you can meet the demand even during unexpected supply chain disruptions.
  6. Review Product Shipments Thoroughly: Regularly review the shipments received from suppliers to ensure they match the purchase orders. Any discrepancies should be addressed promptly.
  7. Conduct Regular Warehouse Audits: Regular audits help ensure that the physical inventory matches the recorded inventory. They can identify potential issues and enable quick resolution.

 

By following these tips, you can develop an effective inventory control system that will help streamline your business operations and improve your bottom line.

 

The Benefits of Training in Implementing Best Practices

Implementing best practices in inventory control is greatly enhanced by comprehensive training. A well-educated workforce can better understand the intricacies of different inventory control methods and apply them effectively in day-to-day operations. Let’s delve into the benefits of training in the context of implementing inventory control best practices.

Enhanced Staff Efficiency

Training programs equip employees with the necessary skills and knowledge to handle inventory control tasks efficiently. Understanding different methods of inventory control, their applications, and the technology used in managing inventory can lead to faster processing times, fewer errors, and overall operational efficiency.

Improved Accuracy

A well-trained team can result in improved accuracy in inventory control. Training on methods such as ABC Analysis, LIFO, FIFO, and batch tracking can lead to precise stock counts, accurate forecasting, and reliable data for decision-making.

Reduced Inventory Costs

With adequate training, employees can make informed decisions about when to reorder stock and how much to order, helping to avoid overstocking or understocking. This could result in significant cost savings and efficient use of warehouse space.

Better Risk Management

Training staff in best practices for inventory control can also improve risk management. Understanding the importance of safety stock, for example, can prepare businesses for unexpected supply chain disruptions, reducing the risk of stock-outs and lost sales.

Increased Customer Satisfaction

Finally, effective inventory control practices, driven by well-trained employees, can increase customer satisfaction. Having the right products in stock when customers want them and quickly rectifying any issues are key to maintaining and improving customer relationships.

 

Frequently Asked Questions (FAQs)

Q1: Can you perform Inventory Control and Inventory Management at the same time?

Yes, inventory control and inventory management are closely related and often performed simultaneously. Inventory control focuses on maintaining optimal stock levels, while inventory management involves monitoring and analyzing inventory data to make strategic decisions for the business. So, while both methods have different focuses, they work hand in hand to ensure efficient and effective inventory management.

Q2: What is a Perpetual Inventory System?

A Perpetual Inventory System updates inventory records in real-time as sales or purchases are made. This system provides a highly accurate, up-to-date inventory count and allows for real-time tracking of sales, purchases, and stock levels.

Q3: How does cross-docking aid in Inventory Control?

Cross-docking is a practice in logistics of unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between. This can help in Inventory Control by reducing the time spent in storage, decreasing the chances of damage, and saving storage costs.

Q4: What is the Economic Order Quantity (EOQ)?

The Economic Order Quantity (EOQ) is the number of units a company should add to inventory with each order to minimize the total inventory costs—such as holding costs, order costs, and shortage costs. The EOQ is part of a continuous review inventory system in which the inventory level is monitored at all times, and a fixed quantity is ordered each time the inventory level reaches a specific reorder point.

Q5: How does the Just-In-Time (JIT) strategy relate to Inventory Control?

The Just-In-Time (JIT) strategy aims to improve a business’s return on investment by reducing in-process inventory and associated carrying costs. In other words, under JIT, inventory is received just in time for it to be used in production, which can significantly lower inventory holding costs.

Q6: How does a consignment inventory agreement work?

In a consignment inventory agreement, the supplier retains ownership of the inventory, but it is stored at the retailer’s location. The retailer only pays for the inventory once it’s sold. This arrangement can reduce the retailer’s risk and benefit the supplier as they can reach a larger customer base.

 

Perform Inventory Control with DATAMYTE

DATAMYTE is a quality management platform with low-code capabilities. Our Digital Clipboard, in particular, is a low-code workflow automation software that features a workflow, checklist, and smart form builder. This tool lets you quickly digitize paper-based processes, such as inventory control procedures, and streamline them for better efficiency.

DATAMYTE also lets you conduct layered process audits, a high-frequency evaluation of critical process steps, focusing on areas with the highest failure risk or non-compliance. Conducting LPA with DATAMYTE lets you effectively identify and correct potential defects before they become major quality issues.

With DATAMYTE, you have an all-in-one solution for inventory control and quality management. Our platform lets you create various analysis tools, including Pareto charts, histograms, and scatter plots, that help you visualize your inventory data and make informed decisions for your business. Book a demo now to learn more.

 

Conclusion

Inventory control is a process that allows businesses to track and manage their inventory. There are different methods of inventory control, each with its benefits and drawbacks. You can improve your inventory management processes and bottom line by understanding the different inventory control methods and choosing the one that best suits your needs.

Use the information outlined in this article to train your employees on the importance of inventory control and its various methods. With proper training, you can reduce inventory costs, better manage risks, and ultimately increase customer satisfaction.

 

 

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