I grew up in what I call a small business family. My father had a small industrial supply business and as a teenager I worked in the warehouse stocking shelves, packaging orders, physically counting inventory, and delivering goods to customers. At the time, I don’t think I understood the difference between managing inventory and inventory control. It wasn’t until much later in my career that I came to appreciate the difference and why both were important.
What is inventory control?
Regardless of whether you manage inventory with software or do it manually, like we did back in the 70s, inventory control consists of the systems and procedures that monitor the movement and storage of what you keep on your shelf and what gets delivered to your customers. A good inventory control practice will help you satisfy customer demand as well as helping you maximize profits.
Although these two practices work hand in glove to ensure you have the inventory you need to satisfy customer demand, there are differences between the two practices.
Inventory control focuses on the physical inventory you have on hand
Inventory management deals with the entire supply chain from the supplier, to your stock on hand, to what gets delivered to the customer
Inventory control answers the questions, “What items are in inventory, where are they located in the warehouse, and what is the condition of this inventory?”
Inventory management answers the questions, “What items do I need to order, how much do I need to order, and when should I order?”
Both practices working together ensure that what you have to sell is what the customers want to buy. If the inventory rule of thumb is the 80/20 rule, in other words, 80% or your profits should come from 20% of your inventory, what is the golden rule of inventory control?
The golden rule of inventory control is to get the quantity and frequency of re-stocking right, keeping inventory costs as low as possible without endangering profitability and growth. Doing this requires a process and organization.
With that in mind, let’s talk about the fundamental ways most companies approach inventory control.
Types of inventory control methods
A lot has changed in the five or six decades since I was responsible for the inventory in my dad’s small business, but even then, these were the principles most companies leveraged to keep track of what they kept on the shelf—the technology to do it though, evolved from legal pads and whiteboards. In the very beginning, we didn’t even had a computer so spreadsheets weren’t available.
The Periodic Inventory Control System
This is the method we used to keep track of our inventory at that time. It basically involved a physical count every quarter, but some organizations do it more frequently—some less frequently, even annually. The frequency depends on the company’s needs and business.
Pros: It’s simple. It doesn’t require any special technology and only requires regularly counting everything on hand to sell.
Cons: It is time consuming and cumbersome if you have a lot of inventory in stock. What’s more, the manual nature of the count is subject to the possibility of human error.
This could be a good system for your business if you have a smaller inventory or you offer niche products and are counting larger-sized goods.
I was counting millions of small nuts and bolts that may or may not have been packaged in easy-to-count quantities. I got really good at using a scale to estimate unmarked quantities. I dreaded the two or three days it required every quarter to do the physical count.
The Perpetual Inventory Control System
The perpetual inventory control system provides an accurate count in real time. It utilizes barcodes and Radio Frequency Identification (RFID) tags for tracking. This information is then held in a database that gives management a more real-time view of what’s in stock and what needs to be ordered.
Pros: There’s no need for a physical count. It makes it easier to make data-driven decisions for sales, ordering, and inventory management.
Cons: There is a need for investment in the proper technology (computers, bar code printers and scanners, or RFID tags and equipment). The technology can become expensive depending on your company’s needs. You may still need to do an annual count to capture things like loss, damage, scanning errors, and shrinkage (shrinkage is how many businesses refer to theft).
This is a good system for companies that maintain large inventories or have multiple locations.
It will require everything that is brought into the warehouse to be identified and tagged (either with a barcode or an RFID tag) before it’s added to the inventory. So there is a little more work on the front end, but there are ancillary benefits too. For example, retailers can add a selling price and cost to the digital file to make it easier at time of purchase for both the customer and the financial team to determine profit or loss on the sale.
4 inventory control tactics that really work
Here are four popular techniques, or tactics, to keep track of how inventory moves through the warehouse. The approach you take will be determined by the type of inventory you have and how you want to address inventory costs within your accounting system (inventory costs fluctuate up and down over time).
LIFO (Last In First Out) and FIFO (First In First Out)
The LIFO method assigns the costs of inventory sold to the most recent batch of inventory purchased for stock with the assumption that more recent inventory costs are higher. It’s also a good way to prevent inventory spoilage for perishable inventory.
The FIFO method uses the costs of oldest stock first. Although this is intended to use the oldest stock first and the LIFO method is designed to use the newest inventory first, in reality, unless it’s perishable, it’s often difficult to tell the difference in the physical inventory.
LIFO and FIFO make it easier for the accounting of costs and the calculation of profit.
This method makes it possible to classify inventory based upon price, sales volume and importance.
A Class: the most expensive inventory or high value items with more controls and likely small inventories.
B Class: mid-priority inventory with average sales volume and stock levels
C Class: low-cost inventory with high sales volume and larger inventory
This allows companies to maintain the appropriate stocking levels based on cost and sales volume.
With this method, inventory managers keep stock together based on where the item comes from, where the inventory is likely going, and the inventory's expiration date (if it’s perishable).
Safety stock is how a company compensates for volatility in the market. This is inventory set aside just in case customer demand exceeds projected demand or to compensate for uncertainty in the supply chain.
Inventory control best practices
Regardless of the inventory control strategies you use, there are a handful of best practices that will help you create a more efficient control process.
Have an organized floor plan: Think of it as a place for everything and everything has its place. My dad and I organized the warehouse with similar items in the same area on the shelves so if we were looking for something we knew where to start looking. Think of how Home Depot or Lowes are organized with lumber, hardware, electrical, etc all organized in the same place.
Use clear labels on items and signs on the shelves: The proper labels on racks, bins, shelves, and merchandise make it easier and more efficient to pull inventory off the shelves for customer orders. If you’re using barcodes or RFID tags, you can input the inventory location in the computer to make the inventory even easier to locate within the warehouse.
Cycle Count: Instead of conducting a physical count of everything at the same time, cycle counting enables you to count small sections of your inventory at intervals. This makes physical counting less time consuming.
Employ an inventory control software system: Automating the inventory control process where possible makes it easier for your employees and helps maintain more accurate inventory counts. This is another place where barcode scanners and RFID systems provide a lot of value.