What Is Inventory Control & Why Is It Important?

Post on Tuesday, May 15th, 2018 in Accounting

Inventory control refers to managing the flow of goods from manufacturers to warehouses and from warehouses to points of sale.

It is an integral part of any supply chain management process, which helps to organize the inventory items in a simple and efficient way. Inventory management also affects other areas of a business, such as sales and purchasing. All of these three areas are interconnected and simply cannot exist without each other.

Many companies use sophisticated inventory control systems to track the new or returned items as they enter or leave a warehouse or point of sale. 

These inventory control systems typically take into account the following aspects:

  • Product attributes, such as color, size, and shape.
  • Product tracking IDs, such as SKU/EAN, serial numbers, barcoding software, etc.
  • Product groups and categories, such as clothing, electronics, food, etc.
  • Inventory levels (amount of items of a certain product at a specific location).
  • Orders, i.e. sales orders and purchase orders involving a specific product.
  • Inventory transactions, such as counting, issuing, receiving, or transferring between locations.
  • Integrations with ERP systems and ecommerce platforms.
  • Reorder point, i.e. the inventory level after which the system should issue low stock alerts.

In this article, we are going to find out the reasons for such importance of inventory management systems for any business. We will also highlight the methods that the companies use to manage their inventory.

Why Is Inventory Control Important?

  • Reduced costs – With a powerful inventory control system, you will know everything about your inventory items in real time: how many of them are in your warehouse, which SKU is almost out of stock, which SKUs move fast and which are slow movers, etc. Inventory management systems also track the costs from purchased goods and can generate reports highlighting the vendors that have the lowest cost on goods. This information will help you manage your inventory more efficiently and  reduce any unnecessary costs.
  • Improved customer service and satisfaction – The state of your inventory controls the relationships between your company and its customers. Efficient inventory management will help you deliver the orders in time and reward the most loyal customers, encouraging them to come back again and again. As a result, you will see increased sales and more profit.
  • No more low stock or excessive stock issues – Some inventory control systems can alert their users when it is time to order new stock (reorder point) or even create automated purchase orders for those items. As a result, the business will never run out of stock unexpectedly. Excessive inventory taking up space can also lead to profit losses if a product expires, gets damaged, or goes out of season. Inventory control gives you a better understanding of customer demand for your products and helps you avoid overstocking.
  • Accurate figures – Automated inventory management reduces the risk of human error, which can be made while recording the transactions. As a result, you will get more accurate figures on your balance sheets and income statements. Many inventory management systems can also generate reports on each and every inventory transaction that is made within your company.
  • Proactivity – Inventory control allows you to plan your inventory, make forecasts, and have backup plans for every aspect of inventory management. Besides, you can analyze the history of your inventory transactions and define the high selling and low selling items. These trends are used to see which months have high inventory levels or the efficiency of inventory purchases. As a result, you will be ready for any possible issues.
  • Streamlined processes – Modern devices such as barcode scanners significantly speed up the inventory transactions, be it recording of a new item, location tracking, or picking and packing activities.
  • Increased productivity – Automated inventory control management solutions reduce the amount of time spent on routine tasks, which makes inventory related operations more efficient.
  • Essential for manufacturers – Manufacturers actually manage three types of inventory: raw materials, works in process, and finished goods. Running out of an essential component stops the production, and this can cost them a lot. Therefore, if your company is not only a retailer but also a manufacturer, it is crucial to have an inventory control system.
  • Optimized warehouse – Many companies organize items in their warehouses by putting the high sellers together and in easily accessible places in the warehouse. Inventory management systems can help to identify such high selling items and thus speed up the fulfillment processes.
  • Opportunity to manage multiple sales channels – If your company uses a multichannel or omnichannel sales strategy, an inventory management system will help you track your inventory and update the inventory quantities in real time across all of your channels.

Methods to Control Inventory

The basic inventory control methods are as follows:

  • ABC analysis – The ABC method divides inventory into three categories that represent the inventory values and cost significance of the goods: category A for high value and low quantity goods, category B for medium value and medium quantity goods, and category C for low value and high quantity goods.
  • Just in Time (JIT) – This method involves analyzing customer behavior, i.e. researching the buying patterns, seasonal demand and location based factors that present an accurate picture of what products are needed at specific places and times.
  • Economic Order Quantity (EOQ) – EOQ represents the optimal order size that will result in the lowest total inventory costs for an inventory item based on its expected usage, carrying cost, and ordinary cost. This is an attempt to determine the order size that will minimize the total inventory costs.
  • Budgetary control – Budgetary control involves planning, implementation and control of business operations. It establishes pre-determined objectives (the number of material units to produce a finished product, required inventory levels, and purchase amounts) and provides the basis for measuring performance against these objectives.
  • Stock review – This is the simplest inventory control method, which is used mainly by small businesses. Stock review involves a regular analysis of inventory on hand against projected future needs.

Do you need to improve inventory control?

Now you know what inventory is control and why it is so important for your business. If you are looking for an intuitive, user-friendly inventory control system, consider Dynamic Inventory for your organization. Our inventory management solution will bring you the benefits similar to those outlined in this article. Please feel free to connect with us if you want to request a demo or learn more about our product. 

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