Inventory Control

Inventory control, sometimes known as stock control, is the process of maintaining a company’s on-hand inventory levels. The goal of this process is to ensure optimal amounts of stock are available to meet customer demand while also minimising any associated inventory costs and business risks.

Without effective inventory control procedures in place, a business can suffer from inefficiencies that impact profitability and customer satisfaction rates.

A common example of this is overstocking – when a company orders more stock than can be sold in a reasonable time. That excess inventory takes up valuable storage space. It accumulates unnecessary carrying costs. And it represents cash flow that is no longer available to be spent.

To improve business-wide productivity and profitability, inventory control systems and techniques can be implemented to create a scaling degree of automaticity.

Inventory control and inventory management are similar terms, but there are some key differences.

Inventory control is best defined as the aspect of inventory management that deals with tracking physical goods once they’re inside a storage facility or retail location. Whereas inventory management encompasses a broader range of tasks – including procurement, production, and sales – with the greater goal of achieving maximum business efficiency and capacity to meet demand.

You may wish to think of inventory control as one of the key pillars of effective inventory management.

Done properly, stock control supports efficient business operations – along with optimised purchasing, sales order management, and performance monitoring.

Inventory control is important for maintaining low costs and high profit margins.

If a business has a large number of stock-keeping units (SKUs), holding even a small amount of excess inventory for each line can balloon costs. This is because unsold stock soaks up cash flow.

It also happens because warehousing and other variable costs (such as insurance) increase as the volume of goods stored goes up.

Here’s a quick summary of the main benefits of effective stock control and inventory management.

1. Fewer stockouts

Sometimes referred to as shortage costs, stockout costs are difficult to quantify but damaging to the business all the same. Poor inventory control leads to stockouts, which accumulate costs related to the loss of sales revenue. These losses affect profitability disproportionately more than the costs of excess inventory.

Other negative impacts of stockouts include:

• Poor customer experience – Failing to deliver goods on time because you don’t hold sufficient stock to meet sales will affect your relationship with customers and harm your brand reputation.

• Reduced efficiency of capital – Stockouts that hinder fulfilment or manufacturing will see machinery and products sitting idle, reducing overall business productivity.

• Lower staff productivity – When staff are unable to work due to a lack of materials or parts for a sale or assembly, you still have to pay them.

2. Smarter purchasing decisions

Knowing the right quantity to buy for each part or product depends on its current rate of consumption, future demand, and lead time.

Lead times and rate of consumption can both be very dynamic – which makes calculating and resetting appropriate min-max levels a time-consuming process, especially when any number of SKUs is involved.

One of the most important features of inventory control systems is the ability to check and set min-max levels based on up-to-date lead time and rate of consumption data for each SKU within the business.

3. Higher profit margins

A company’s profit is the remainder once the cost of goods sold (COGS) is subtracted from net sales. COGS is comprised of every cost the inventory incurs along the way to being sold.

If too much cash is invested in inventory, it comes directly off the bottom line until it is recuperated through sales. If insufficient inventory is supplied for the demand, sales are essentially left on the table – resulting in less profit and dissatisfied customers.

A strong inventory control process optimises inventory levels to bring your cost of goods sold down and help you sufficiently meet sales demand, ultimately improving profitability.

4. Reduced inventory carrying costs

Excess stock in the warehouse incurs storage and insurance costs which also add to the COGS and decrease profits. Likewise, needless travel throughout the warehouse can account for a significant amount of wasted labour hours.

Proper inventory control looks at which products are used or sold most often so they can be kept close to the packing area for faster fulfilment.

5. Accurate inventory accounting and financial reporting

Inventory management relies on accurate record-keeping and data entry.

When this goes awry, incorrect quantities of products could be ordered resulting in unnecessary expenditure. Incorrect data entry can also reduce supply chain efficiency and make it impossible to meet financial reporting obligations.

The right inventory control techniques are essential for tracking vital business performance metrics and avoiding the risks associated with poor inventory accounting.

Inventory control looks a little different across different industries. An electronics manufacturer, for example, will be dealing with different stock-related challenges and workflows than, say, a grocery store or clothing retailer.

Here’s a quick breakdown of the most common types of inventory control as it relates to various sectors.

Retail inventory control

Retail inventory control, also called store inventory control, deals primarily with stock that is on the shelves of a physical shop available to be purchased.

This type of goods is known as merchandise inventory.

Because merchandise inventory is typically finished goods purchased for resale from another supplier, it’s often simpler to manage than other types of stock. However, the fast-paced nature of retail environments adds an extra layer of pressure to ensure stock is controlled in the most efficient way possible.

Warehouse inventory control

Warehouse inventory control refers to overseeing and managing the goods and materials stored in a company’s warehouse or distribution centre. Like retail inventory control, it pertains mainly to finished goods – products that have completed the manufacturing process. Unlike retail, however, warehouse inventory may include bulk stock intended to be sold wholesale.

An added challenge that comes with warehouse inventory control is that it often needs to be synchronised with order fulfilment, as goods are frequently picked, packed, and shipped out of the building.

Manufacturing inventory control

Inventory control is particularly important for manufacturers. The lack of a single raw material or component can disrupt an entire production run, resulting in serious losses and order delays.

Manufacturing inventory control can relate to both internal and external production processes. The latter may involve, for example, a contract manufacturer.

Coordinating with external manufacturers can add to the challenges of managing physical inventory, as delays can mean losing a scheduled production slot or higher fees. Manufacturers will often use batch tracking, lot tracking, or serial number tracking tools to help manage the complexity of inventory control for production.

As a business grows in size and complexity, the challenges associated with inventory control get harder to tackle – and present far more risk. While small business inventory control may seem simple at first, you ought to be aware of some common problems you could face further down the track.

Here are some of the main inventory control challenges:

• Accurately predicting demand – Understanding the various data points, trends, and other influences that can be used to forecast demand is rarely straightforward. However, getting your calculations wrong can be a costly mistake.

• Mitigating supply chain disruptions – This refers to everything from unreliable suppliers and lost deliveries to global disasters, raw materials shortages, and price hikes. Establishing an agile supply chain can mean the difference between business failure and continued success.

• Inventory shrinkage – Also known as inventory discrepancies, shrinkage occurs when your recorded stock levels do not match reality. It can be caused by things like theft, damage, administrative errors, or supplier fraud.

• Managing stock across multiple warehouses – As a business expands its global footprint, it can become more economical to store goods in multiple physical locations. Synchronising inventory control between all these facilities is essential for maintaining an accurate business-wide understanding of your stock position.

• Preventing stockouts and overstock – Each of the challenges just mentioned exacerbates the real obstacle inventory controllers face: identifying and maintaining optimal levels of stock for every SKU. Just one miscalculation or unforeseen delay can lead to a stockout or overstock – two problems that, in one way or another, equal lost profits.

While these issues can create a serious headache for inventory managers, there’s good news.

Most challenges associated with stock control can be resolved by using the right techniques, systems, and data. We’ll explore some of these solutions now.

An inventory control technique is an approach you can take to better manage stock while it is physically within your business. The ones in the list below are commonly used by thousands of businesses around the world to improve stock accuracy and operational efficiency.

Many of these techniques can also be used in tandem to achieve compound benefits.

1. Barcode inventory control

Barcode inventory systems enable you to leverage barcode-scanning technology to gain greater supply chain visibility and inventory accuracy. They rely on a network of hardware and software – which usually includes mobile devices and barcode scanning software – that help you digitally record and track stock updates in real time.

2. QR code inventory control

An alternative to barcode inventory management, QR code inventory control performs a similar function. It allows you to track and manage all your physical inventory on the cloud with live updates. However, QR code systems can encode more information than barcodes – such as product page URLs – and are less easily damaged.

3. Just in time (JIT)

Just in time (JIT) is an inventory control technique that seeks to maintain the lowest levels of stock on hand necessary to meet consumer demand at all times.

At one end of the supply chain, JIT manufacturing means materials, components or ingredients arrive immediately before they’re used in the production process – and finished goods aren’t sitting around before they’re sold. That way, the costs and risks associated with holding goods are kept to an absolute minimum.

At the other end of the supply chain, JIT means ordering the bare minimum quantity of stock needed to meet retail or wholesale demand. Resultingly, effective JIT inventory control requires a strong demand planning strategy and good data.

4. Just in case (JIC)

Contrary to JIT stock control, just in case (JIC) is an inventory control strategy that concentrates on ensuring there is a sufficient buffer of safety stock available at all times. While less cost-efficient than other methods, JIC has gained increasing popularity in recent times due to the rise in supply chain disruptions and limited supplies of raw materials.

Where the just in time approach may appeal to businesses looking to reduce the risk of overstocking, just in case stock control is better suited to businesses more focused on mitigating the risk of stockouts.

5. ABC inventory control

Based on the Pareto principle – the idea that 80% of value comes from 20% of substance – ABC analysis in inventory management is a useful technique for identifying your most valuable stocked items. Once you’ve used it to classify stock based on value, you can begin to organise your warehouse and inventory control methods around those assignations.

6. Vendor managed inventory

A vendor managed inventory (VMI) method is where the supplier is responsible for controlling inventory levels at the retailer level. Under VMI, stock is sometimes held on a consignment basis, meaning the supplier retains ownership until it is sold.

7. Dropshipping

Dropshipping is where the business making the sale holds no stock. Instead, they pass the details of the purchaser directly on to the supplier who fulfils directly. Dropshipping offers one huge advantage: not requiring any capital outlay on stock to make sales. However, it often involves longer lead times for the consumer – as well as reduced quality control for the business making the sale.

8. Inventory optimisation

The operational process associated with improving inventory control is known as inventory optimisation.

It refers to a series of steps carried out to maximise inventory turnover and set optimal min and max stock levels.

Setting an appropriate min-max level for every product in a portfolio requires:

• The ability to measure historical lead times for every SKU
• The ability to measure historical rate of consumption for every SKU
• The ability to set appropriate safety stock buffers
• A way to easily apply new min-max levels to each product
• Manual oversight and control
• Integration with the purchase order raising system used

Advanced Inventory Manager (AIM) is an inventory control system that automates this process. AIM solves one of the biggest challenges for supply chain managers – setting the right minimum and maximum stock level for thousands of parts, components, ingredients or finished products – without spending hours fiddling with unreliable spreadsheets.

9. Stocktaking

Stocktaking is the process of counting and recording the inventory that your business has on hand. Stocktakes match your inventory records with your real-world situation, allowing you to understand and adjust for any discrepancies – including any loss through damage or theft. Annual stocktakes are also a legal requirement in most jurisdictions.

10. Economic order quantity (EOQ)

Economic order quantity is a formula that helps you calculate ideal replenishment quantities for each of your stocked items based on inventory carrying costs and historical usage. This sophisticated inventory control technique can help you minimise overspending and improve profitability by reducing your total cost of sales.

An inventory control system is any solution that helps a business control inventory. It is primarily concerned with ensuring sufficient material is available to meet the company’s needs while keeping investment in stock within bounds.

Here we look at the most common types of inventory control systems and who should use them.

First, we should break down the two main types of inventory control systems:

• Periodic inventory system: In a periodic system, stock levels are checked at set intervals and replenishment decisions are made accordingly. Stock updates rely entirely on stocktakes. Many small businesses begin by managing their stock this way. However, as businesses grow, the cash flow impacts of overstocking can make periodic inventory systems an expensive and inefficient solution.

• Perpetual inventory system: A perpetual inventory system tracks stock movements in real time, allowing for more accurate, ‘live’ inventory control. Stock adjustments can be updated automatically – for example, stock arrivals to a warehouse recorded via barcode scanners – and sales data from multiple sales channels is synchronised to improve efficiency and reduce the risk of overselling.

Each of the following inventory control systems falls into one of the categories above:

Basic inventory control system

In a brand-new business, or one that does not deal with a lot of inventory, a basic inventory control system can be used to keep track of all your stock movements. This could look like a single document on a computer, a piece of paper on a clipboard, or perhaps just the inside of an inventory manager’s memory bank.

While this approach is unsustainable for growing or complicated businesses, it’s free and may suffice for the early days of trading.

Spreadsheet-based inventory control system

The next step up from the pen-and-paper approach is to track stock on an inventory control spreadsheet, typically hosted on Microsoft Excel, Google Sheets, or another similar platform.

Formulas can be used to automate some of the financial calculations.

However, updating and reviewing inventory spreadsheets is typically a laborious manual task that’s prone to human error. This can result in spreadsheet-based systems becoming more trouble than they’re worth as a company’s inventory size and order quantities increase with its growth.

Accounting software with inventory control functionality

To add another degree of automation, some businesses upgrade their inventory system from spreadsheets or basic inventory control to accounting software with inventory management features. The primary benefit is that your inventory data is automatically synchronised with your financials, saving you precious time and improving accuracy when it comes to end-of-year reporting.

While accounting software can be a handy first step towards automated inventory management, it often lacks the dedicated functionality required to maximise efficiency and reduce costs across all your inventory control processes.

Cloud-based inventory control software

Cloud-based inventory control software, also known as inventory management software, is a perpetual inventory management system that helps you automate key stock control processes including inventory optimisation and purchasing management.

Cloud-based systems help you track all your product costs, stock locations, and multichannel sales orders in real time. Modern solutions also often integrate with other digital tools, such as CRM or accounting systems. These connections help you establish a central source of accurate information in your business.

Learn more: The 4 Best Inventory Control Software in 2024

Inventory control charts, also known as inventory control diagrams, are visual representations of the inventory replenishment cycle.

Most modern inventory control software systems let users represent their inventory cycle in a visual format – these charts are also a useful way for students to learn the inventory control cycle.

In an inventory control diagram shows the volume of stock held for each SKU is graphed, with:

• Peaks that represent maximum stock levels.

• Troughs that represent the minimum stock level.

• A line showing the ‘reorder point’ where a purchase order for new stock is raised.

The horizontal gap between the reorder point and the maximum level represents the lead time: the time taken for the delivery to reach the warehouse, after a new purchase order is raised.

An inventory control chart is an excellent way of visualising some of the core elements of the inventory control cycle, all of which influence the purchasing and inventory replenishment decisions that supply chain managers make. 

The key elements of inventory control include:

Min stock

In an inventory control chart, the min stock level usually shows the lowest level of stock for a SKU, before it’s topped up by the arrival of a new delivery to the warehouse.

However, it’s important to note that, in practice, the term ‘min stock’ is often used interchangeably with ‘reorder point’ – the level of stock at which a new purchase order is raised. Many inventory control software tools use ‘min stock’ in this way.

Max stock

Max stock in an inventory control chart shows the greatest amount of stock held for a SKU.

When a purchase order is placed it should take the total volume of goods up to the max stock level. Holding more than your max stock level for any SKU means you are overstocked, and therefore running inefficiently, with too much capital tied up in parts or products.

Your max stock level might also be dictated by physical restraints such as limited warehouse space.

Safety stock

Delays and unexpected problems are part of doing business in the real world, so businesses typically hold what’s known as safety stock, or buffer stock.

Safety stock helps the supply chain run smoothly by preventing delays that disrupt the overall operation.

The ideal quantity of safety stock held for each SKU can be worked out with the safety stock formula, which factors in the rate of sale or use of each item, as well as minimum and maximum lead times.

Lead times

Lead time is the time it takes for goods to arrive in the warehouse after being ordered.

Lead times play a major part in setting ideal min-max levels. A business with long lead times needs to hold more stock to cover the consumption of inventory – through either sales or production – during the period between reordering stock and when it arrives.

A company that can shorten its lead times will tie up much less capital in stock. For similar reasons stable lead times free up cash flow for businesses, as less safety stock is needed to cover for disruptions and delays.

Rate of sale or use (aka rate of consumption)

The rate at which goods are consumed by a business – whether through sales or within production – is another very important element of the inventory control cycle. The amount of any SKU ordered within the inventory replenishment cycle is a function of its individual rate of consumption and its lead time.

So for example a company that sells 10 chairs per day, with a lead time of 10 days for that item would need to order 100 chairs to cover sales during that period. However, if the rate sale was only 5 chairs per day, 50 chairs per order would suffice.

Reorder points

The reorder point is the level of stock, unique for each SKU, at which a new purchase order should be placed to prevent that item running out. Supply chain managers can use the reorder point formula to work out an appropriate reorder point for each part product.

The reorder point formula uses rate of consumption, lead times and safety stock figures for each SKU to work out the ideal level of stock at which new material should be ordered.

Let’s begin with the bad news. There’s no best method to control your inventory.

Now for the good: there are several different approaches and models you can implement depending on your business’s unique needs. Here are our top five best-practice inventory control methods.

1. Set PAR levels

One way to run an efficient warehouse is to set Periodic Automatic Replacement (PAR) levels – minimum on-hand quantities of inventory stock – for your business. These help you reduce the risk of overstocking while avoiding stockouts.

Conditions can change over time, so monitor PAR levels a few times throughout the business year to ensure they still make sense and to adjust up or down accordingly.

2. Improve supplier relationships

Supplier issues can easily impact your inventory control techniques. Building solid relationships with all your suppliers is imperative if you want your business to run smoothly.

Review all your suppliers regularly to ensure the partnership is working for both parties.

If you don’t think it is, it might be time to find a new supplier.

Let suppliers know when you are expecting an increase in sales to allow them time to adjust production. Have them notify you if a product is running behind schedule so you can halt promotions or consider a temporary substitute.

3. Audit regularly

Regular reconciliation is vital and doesn’t mean you need to conduct regular physical stocktakes. It’s important, however, to ensure that reports and physical stock numbers match up.

Cloud-based software will provide you with real-time inventory data and allow you to freeze your inventory records during a count. Conduct regular manual audits monthly, quarterly, or annually depending on the size of your product portfolio and unique business needs.

4. Correctly classify products

Categorising your products and components into an easy-to-understand, user-friendly system is a solid first step towards proper inventory control. The methods for classifying goods can differ from company to company, but there are a few common methods you can employ. The ABC method, for example, categorises items according to their value and documentation requirements.

5. Optimise warehouse management

Warehouse management is about improving the effectiveness of your warehouse and its staff. 

A good warehouse management system will often come with a flexible location system and customised categorisation for easy storage, movement and picking. This will increase inventory accuracy while reducing cycle times and handling costs.

Let’s look at a couple of examples of inventory control being applied to a product business. We know these businesses well and love sharing their stories with readers.

Example 1: Hilditch & Key

Hilditch & Key have been selling luxury menswear since 1899, with a flagship store on London’s famous Jermyn Street plus a store on Paris’ Rue De Rivoli. They also sell worldwide through their online store.

Hilditch & Key’s inventory control problem took two main forms: they had a significant overstock issue, which created a drag on cash flow and efficiency. They also simultaneously experienced the opposite issue, with regular stockouts on some lines.

Customers were frustrated when attempting to purchase clothing online that wasn’t in stock.

Hilditch & Key did have an inventory system in place in the form of SAP Business ByDesign, but this was unable to meet their inventory control needs. They needed a system that accurately shared stock levels with their ecommerce platform and integrated well with their accounting tools.

They investigated options and subsequently implemented Unleashed.

Inventory control at Hilditch & Key dramatically improved.

With better visibility of the value and quantity of stock on hand they were able to reduce their overstock by 30%. The number of stockouts has reduced by 50%, and overall they increased their efficiency, saving 35 hours per week, which equates to around a 15% saving on their admin costs.

Example 2: Tielka Organic Tea

Tielka Organic Tea is an Australia-based high-end tea merchant that sells both wholesale and direct-to-consumer (D2C), with a sales mix that includes online tea subscriptions. They also produce their own teas, which they blend out of bulk ingredients.

Inventory control was conducted ‘by sight’, with replenishment decisions based on a visual assessment of which stock was running low, and records kept in Excel spreadsheets – a situation that founder Domorev describes as “a mess”.

As the business grew this system began to fall apart, with regular stockouts disrupting business.

This was particularly damaging to the company’s café and restaurant customers, who needed to meet the needs of demanding patrons.

Tielka implemented Unleashed inventory control softwar, and integrated it with their accounting system, Xero, and their online ecommerce platform, Shopify – as well as a dedicated fulfilment app called Starshipit. They run two different Shopify stores: one for direct-to-consumer sales and one for wholesale orders.

Tielka now has total oversight and control over its inventory levels. The business is far simpler to run, with inventory levels accurately matched to business needs and less time spent on inventory control.

Unleashed’s cloud-based inventory control software enables you to see live stock levels as adjustments are made across the business, reducing your reliance on manual counts for accurate information. It easily integrates with all your sales channels and other business software – creating a single source of truth for your business.

Unleashed is an automated inventory management system that streamlines inventory control processes, boosts inventory accuracy, and helps you minimise your stock costs.

Follow these steps to find out if Unleashed is the right solution for you:

1.  Watch an inventory control software demo. See how our cloud-based inventory control system helps you optimise operations and automate your workflows to save time and reduce errors.
2. Sign up for a free 14-day trial. See first-hand the ways Unleashed stock control software can help you streamline inventory management with a risk-free two-week trial.
3. Chat with an inventory control expert. Book a free chat with one of our friendly experts for an honest discussion about your inventory management needs.