Proper inventory control is the key to success for any business— and it all starts with deciding which inventory management system your company should implement.
Managing inventory may seem like an easy enough task at first glance. On a basic level, it's all about ensuring you have the right amount of product coming in and going out. But your company's success depends on finding the perfect balance. Purchasing too much of a product will cause waste and increased financial costs if the product is not sold, while having too little of a product in stock will result in a loss of potential sales.
That's where inventory control procedures come in. But it can be tricky to figure out what strategy is right for your business since there are so many different methods to choose from. How do you know which inventory management technique to pick? Which one will work best for your company?
If you have these questions, you've come to the right place. We've got all the answers here, including 13 inventory control techniques that every business owner should know about! Let's get started!
What is inventory control?
Simply put, inventory control is the practice of monitoring and managing stocks. Businesses need to know how much inventory to order, when to order it, and how much it will cost.
They can do this by tracking inventory down the supply chain—from receiving goods from suppliers to shipping them off to buyers. The goal is to achieve an appropriate balance of stock on hand.
If businesses have too much inventory, they risk wasting money and space—and if they don't have enough, they'll lose out on potential sales. The last thing any business owner wants is for their company's cash flow to be directly affected by something as simple as ordering or maintaining inventory.
By using inventory management techniques, businesses can ensure appropriate stock levels—enough to meet customer demand, but not a surplus that could raise storage costs.
So let's take a deeper look at why inventory control is essential and how putting an inventory management system in place can benefit your business.
Inventory Control Methods
ABC Inventory Management
The ABC inventory management model categorizes products based on their value, assigning three categories, ranked by decreasing order of importance: A, B, and C.
Products in Category A are goods that rank highest in value based on consumption.
Products in Category B are goods of moderate value that account for some income but not as much as stocks in Category A.
Products in Category C are the lowest value goods.
Ranking products this way helps businesses to have a better idea of what products should be prioritized and allows them to place higher controls on these items—they can save time and labor by focusing on the products that make them the most money.
However, implementing an ABC analysis takes time, money, and resources for the management system to run smoothly. Collecting and analyzing data can be costly and, therefore, such a system may be more efficient for larger businesses.
Batch tracking is an inventory management technique that companies use to better manage their inventory by grouping and tracking similar stock.
Batch tracking is helpful if you want to track the expiration of many products at the same time. If a problem comes up with your product, you can trace it back to the initial batch to ensure that other products are not defective—making batch tracking an effective quality control method.
Batch tracking, however, is not an effective inventory management technique for companies with diverse inventory because items cannot be personalized.
Bulk shipments are, as the name suggests, large quantities of goods transported together. This is cost-efficient because shipping in bulk is generally cheaper.
However, items transported in bulk are often not packaged, so it is only useful for certain types of inventory, specifically products that won't get damaged during shipping.
Consignment inventory is when an owner of a product allows another vendor to sell their stock. This technique cuts down on costs since the seller won't have to store their goods in a warehouse.
The owner only receives a profit if they sell the goods, however. And if they do sell, the third-party vendor gets a cut of the total profit.
Cross-docking is the transfer of incoming goods directly to shipment without storing them in between—instead, products are sorted and packaged at the site before being loaded in transport carriers for shipping.
This is an effective inventory management technique if you want to cut costs on storage since cross-docking allows goods to move faster through the supply chain, thus reducing warehouse and holding costs.
However, it requires investing in transport carriers and precise planning with suppliers for quick turnover.
Dropshipping has been growing in popularity as more and more people become familiarized with e-commerce.
Rather than producing merchandise themselves, sellers can simply offer to sell the products made by other companies without carrying any inventory.
This requires less startup capital and allows sellers to focus on marketing their site rather than warehousing and shipping. And if you want to make even more money as an e-commerce seller, you can find success in dropshipping high ticket items.However, there is a lot of competition in dropshipping, and you’ll have to market yourself if you want to succeed. If you’re trying to decide what platform to get started on, check out our guide on using Shopify vs. Wix for ecommerce and dropshipping.
Demand forecasting is an inventory management tool used to calculate the potential demand for a product in the future.
Demand forecasting is used in conjunction with supply-chain management to help enterprises determine the right amount of inventory they should carry at any given time.
A business can calculate its forecast using historical data, such as how many units of each product were sold daily or annually. With that information, a company can calculate its average output. They can then use that figure to determine the appropriate number of units they should order from their supplier.
Economic Order Quantity (EOQ) Model
The Economic Order Quantity (EOQ) model is used to determine how frequently inventory needs to be reordered. The formula can also help calculate how much product a company should purchase to be the most cost-efficient.
The ultimate goal of this model is to reduce unnecessary expenses—holding costs are decreased and there is less waste when the right amount of inventory orders are placed.
Just-in-time Inventory Control
Just-in-time (JIT) inventory control is a supply chain management strategy that aims to reduce costs by minimizing inventory. This inventory management system reduces waste because new products are ordered only when they need to be replaced.
Instead of stocking up on materials and having high storage costs, companies using JIT strive to have only the products that they need, when they need them.
Using just-in-time practices minimizes costs—but it’s not without risk if anything goes wrong along the supply chain. There is little room for error; delayed shipping or a problem in production can mean that your business risks running out of stock.
Additionally, implementing an effective JIT system can present challenges to small businesses lacking the staffing and tools for precise control. That's why this method is better for larger, established companies.
The Periodic Inventory System
The Periodic Inventory System (PIS) is a method for tracking average inventory trends over a period of time.
By doing inventory counts on a regular basis, businesses will have a better idea of when they need to restock goods. This is because they can track the average amount of inventory that they have between each count.
Therefore, the PIS system focuses on minimizing risk and waste by not over-ordering or under-ordering stock. It ensures that businesses will be able to use their funds efficiently and prevent excess items from building up in storage.
The Perpetual Inventory System
The perpetual inventory system updates inventory balances by tracking every incoming and outgoing product using real-time data. This inventory count can be achieved by using barcodes or other electronic systems.
The perpetual inventory system allows a retailer to quickly determine what items to reorder from suppliers before running out of stock by keeping accurate inventory records.
Safety Stock Inventory
Safety stock inventory is an inventory technique that ensures companies have a backup reserve of products. Companies must anticipate a certain amount of loss and keep the extra product in stock to meet projected sales demands without interruption.
Safety stock inventory is helpful if the initial products shipped were damaged or defective. Alternatively, if a product sells more quickly than anticipated, having extra inventory on hand works as an effective backup plan.
Six Sigma is an inventory management process that uses data and statistical analysis to measure the operational effectiveness of business processes.
Six Sigma aims to reduce the percentage of defective products to ensure that the quality of goods is top-tier. The business cycle begins with identifying the problem, followed by finding a solution to the issue. The third part of the process is to implement an action plan for improvement.
This inventory management technique focuses on reducing defects in products by pinpointing their source and fixing them to reduce waste. This also results in happier customers because fewer product returns are made.
Why is inventory control important?
Staying on top of your inventory levels is essential if you want your business to stay organized and optimize profit.
Implementing an inventory management system allows companies to avoid overstocking and shortages, track products down the supply chain, and cut inventory costs.
Without proper inventory management, companies can have too many or too few items on hand, causing problems with customer service and storage costs.
Now, let’s get into how using inventory management techniques can elevate your business.
Improved Customer Service
Customers like to know that they will receive the products and services they want as quickly as possible after ordering them. But if the item the potential buyer wants is out of stock, they will likely take their business elsewhere.
Meanwhile, companies want to keep costs low and generate as much revenue as possible while maintaining quality customer service. To meet customer demand and build loyalty, companies need to keep adequate inventory levels and avoid stockouts.
Implementing an effective inventory management strategy increases both customer satisfaction and company profits—so that both sides can achieve their goals!
Cut Costs on Storage
While shortages and stockouts can create problems with customers, they aren't the only potential inventory issues. Avoiding surpluses and deadstock is also essential if you want to optimize profits.
Keeping products in storage or warehouses can be pricey. An excess of inventory in storage can potentially lead to waste if products are perishable. And if you have unused inventory in a warehouse, you are paying unnecessary costs for that space.
Knowing exactly how much stock you need or using alternative inventory management techniques that don’t use warehouse storage can help you cut costs.
So if you want to increase customer satisfaction and maximize storage efficiency, an inventory control system can help.
But with so many different systems available, it can be challenging to decide which technique is the best for your business.
That's why the above inventory control procedures should be kept in mind and used as needed when running a business.
Inventory Control Methods FAQ:
Inventory control is the practice of monitoring and managing inventory levels. Businesses need to know how much inventory they have on hand and where it's at in their supply chain (from receiving goods from suppliers all the way through shipping). Inventory management techniques are implemented to ensure that companies don't run out of stock or waste products—as always, the aim is to optimize profit.
Businesses need to have proper inventory management in order to stay efficient and profitable when it comes to inventory costs. Without it, companies will either overstock or won’t have sufficient stock. This can be problematic for customer service as well as storage costs. Therefore, implementing inventory management techniques can benefit any business looking to meet customer demand and cut costs on warehouse storage.
Here are some essential inventory management techniques:
Inventory management requires a reliable means of tracking and managing inventory – and storing that data to facilitate further sales and purchase decisions.
Fortunately for businesses, there are industry-specific management software programs designed to improve and implement better inventory control methods.
And, better yet, you can find companies that specialize in inventory control software online to facilitate the process for you.
As you can see, there are a wide variety of inventory control techniques to choose from, all of which can help you save time and money. Every inventory control system comes with unique benefits and challenges, so make sure to weigh the pros and cons to find a technique that fits your business needs.
Implementing a successful inventory management system doesn't have to be complicated or expensive—in fact, many of these methods are easily accessible for small businesses or entrepreneurs. And we’re here to help. Whether you’re just getting started or you’re looking for manufacturers that offer high-quality and affordable merchandise, we have the tools to help you figure out the logistics of shipping and inventory management.
By investing a little time and research to find out which inventory control system will benefit you most, you'll be able to minimize costs and optimize profit. So use our guide today to find what inventory management system or technique is best for you!