Inventory Control

Inventory control, also known as stock control, refers to the process of managing a company’s warehouse inventory levels. The inventory control process involves managing items from the moment they're ordered; throughout their storage, movement, and usage; and to their final destination or disposal. Many systems, processes, and technologies have been developed over the years to help companies streamline the supply chain processes involved in inventory control systems.

Note: According to Investopedia, inventory is usually one of the largest current assets appearing on a business’ balance sheet. As a result, finding ways to manage inventory efficiently can significantly impact an organization’s bottom line.

Important Inventory Control Processes and Formulas

Over time, different inventory control processes and formulas were created in order to help companies with the complexity that is inventory control. Let’s take a look at what some of these essential inventory control processes are, and why they're important for companies today. 

Quality Control

Quality control is an essential part of inventory control, and the processes you use have a dramatic impact. When you work with a supplier that has the same quality standards as you do, over time, you develop a long-term relationship. Once you have your suppliers, batch tracking ensures your stock consistently meets your highest quality standards.

Organizational Control

It may seem like a simple concept, but it does make a difference to have your stock meticulously organized with a stock control process. An organized inventory system begins by labeling your stock with SKUs that are easily understandable and simple to read. Start with an initial stocktake, and then use the right inventory tracking system to keep track of movements and levels.

Reorder Point Formula

The reorder point is a way of controlling inventory that determines the right time to order more stock. Calculating this means adding together your lead time demand in days and safety stock in days.

Basically, reorder point = lead time demand + safety stock.

Economic Order Quantity (EOQ)

Finally, EOQ is the optimum inventory you should purchase to minimize the costs of ordering and holding. You’ll need to know your annual fixed costs, demand in units, and carrying costs per unit (H) in order to calculate this. 

Then, you can use the formula summed up by Accounting Coach: the square root of [(two times the annual demand in units times the incremental cost to process an order) divided by (the incremental annual cost to carry one unit in inventory)] in order to find your economic order quantity

Managing Inventory With an Inventory Control System

An inventory control system is a computerized solution that brings all aspects of inventory management into one cohesive system. Its purpose is to help control your stock in order to hold the least amount of inventory in your warehouses and ultimately improve cash flow and lower holding costs.  

A wide range of manufacturing, distribution, and retail facilities use inventory control systems to manage the movement of items throughout their business. Some businesses may be tracking the movement of finished products from suppliers to customers while others may need to order raw materials to produce a finished product. Facilities managers may need to track maintenance, repair, and operations (MRO) inventory, which includes items like hand tools and janitorial supplies used to keep an organization running.

In all cases, items must be identified with a name or number, barcode, or radio frequency identification (RFID) tag, so they can be easily tracked. Items are then manually recorded or automatically scanned, so they can be followed and managed in a central computer system such as a CMMS.

Integration into a main computerized system as well as high quality data are key to a successful inventory management system.

An effective inventory control system can help you ensure you have the right amount of raw materials, MRO supplies, or finished items on hand to meet your demand. This may mean higher customer satisfaction or reduced downtime on a manufacturing line.

Understanding what you have in inventory, and where it's located, can eliminate write-offs and unnecessary re-ordering to replace lost items. If you have an integrated inventory control system, you can authorize automatic re-orders on critical items and manage suppliers and invoicing more efficiently as well.

Choosing the Right Inventory Management Software

Finally, choosing the best inventory management software will have a tremendous impact on your inventory control processes. And it can be either good or bad. Good software streamlines the process; lower quality software creates an additional set of issues that companies then need to deal with on top of everything else

When you use a set of processes and formulas in tandem with the right inventory control software, inventory control can be simple. It’s up to the companies to build the right framework to support it. 

Want to keep reading?

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To measure performance in inventory management, one of the most common metrics to use is “number of inventory turns" and target a value greater than 1.0.
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What metrics are most important for inventory management?

Techniques to manage inventory can vary depending on the type of inventory being kept and the nature of the business.
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What is the true cost of poorly optimized inventory management?

Poorly optimized inventory management can cause higher carrying costs, losses from overbuying, and missing items and stockouts.
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