In today’s fast-paced and unpredictable global market, the secret to maintaining a competitive edge lies in a key area—robust inventory control techniques. It’s no longer a luxury but a necessity, a critical cog in the wheel of successful supply chain management and warehousing.
Inventory control is the act of managing and organizing stock to meet customer demand without surplus or deficiency. It’s a delicate balancing act that directly influences a company’s profitability and customer service levels. Poor inventory management can lead to stockouts, overstocks, or worse, lost customers. In a world where customer loyalty is hard-earned, that’s a price no business can afford to pay.
A recent study revealed that overstocks cost retailers a staggering global loss of $362.1 billion each year. Despite these compelling figures, many manufacturers are still wrestling with inventory optimization. Traditional manual processes and the “we’ve always done it this way” mentality are proving to be substantial roadblocks. Many companies prioritize forecasting and inventory management but often neglect the efficiency of the stock that’s on hand. This is where inventory control techniques come in.
Defining Inventory Control
Inventory control, often interchangeably used with inventory management, is a systematic approach to sourcing, storing, and selling inventory—both raw materials and finished goods. It encompasses all the processes and procedures that secure the optimal stock quantity to meet customer demand without causing unnecessary costs or inventory overflow.
At its core, inventory control is a delicate dance between having enough products to satisfy customer orders at the right reorder point and avoiding overstocks that tie up capital and warehouse space. The goal is to minimize the cost of inventory while maximizing the ability to provide customers with products in a timely and efficient manner.
Poor inventory control can harm customer relations, as they may turn to competitors when products are unavailable, or delivery is delayed. For manufacturers, inventory control is not just a requirement, but a strategic tool that, if used effectively, can become a competitive advantage. By ensuring products are available when customers want them, businesses can improve customer satisfaction, increase sales, and propel growth.
‘Inventory control’ and ‘inventory management’ can be used interchangeably, but denote distinct, closely related aspects of a business’s operations. Understanding their differences, common misconceptions, and interplay is key to optimizing your inventory processes.
Inventory management, takes a broader, more strategic approach. It involves overseeing the entire inventory lifecycle—from purchasing and delivery to storage and dispatch. Inventory management encompasses inventory control and includes other activities like supplier management, order fulfillment, and demand forecasting. The better you understand your inventory management processes, the more confident you will be in implementing effective inventory management software.
Understanding the Four Major Inventory Control Techniques
In inventory control, four techniques stand out for their ability to significantly enhance efficiency and accuracy. Each technique brings its own advantages and is suited to different situations like small businesses versus an enterprise business and can even fit specific types of inventory. Let’s dive into each of these techniques in detail.
Last In, First Out (LIFO) & First In, First Out (FIFO)
The Last In, First Out (LIFO) method operates on the principle that the most recently acquired or produced items are the first to be sold or used. This technique is ideal when inventory items are non-perishable, or in industries where product value decreases over time, like electronics or fashion.
Regarding accounting, LIFO can help reduce tax liabilities in times of rising prices by assuming that the latest, higher-cost items are sold first. However, it’s worth noting that this method is not permitted in some countries under International Financial Reporting Standards (IFRS).
Unlike LIFO, the First In, First Out (FIFO) method assumes that the oldest items in inventory are sold or used first. FIFO is an excellent fit for businesses dealing with perishable goods or items with a shelf life to prevent spoilage, ensuring the oldest products are sold before they spoil or become obsolete.
FIFO can lead to higher net income than LIFO during rising prices as it assumes the sale of the lower cost of goods first, which also helps with cash flow stresses.
ABC Analysis is a method that identifies and categorizes inventory items based on their value and importance. Here is how the categories are defined:
- A-class items represent high-value, premium goods that require stringent controls and are typically held in smaller quantities due to their cost.
- B-class items are mid-range in terms of price and priority, with average sales volumes and correspondingly moderate inventory levels.
- C-class items are those of lower value and cost, which despite their high sales volumes, often result in large inventories due to their lower individual cost.
This technique allows businesses to prioritize resources and focus more on managing ‘A’ items that significantly impact the bottom line. It’s a powerful tool for inventory optimization and auditing, enabling more effective and efficient inventory control and more accurate inventory counts.
Batch Tracking, also known as lot tracking, involves tracking groups of items from production to sale. This method is particularly important for businesses dealing with perishable goods, regulated goods, or items with expiration dates.
Batch tracking enhances traceability, which can be invaluable during recalls or quality issues. It allows businesses to pinpoint precisely which items are affected, minimizing the impact of dead stock on customers and the business.
Safety stock is essentially a buffer for stock kept on hand to guard against variability in demand or supply. The key with safety stock is finding the right balance— too little could result in stockouts, while too much could lead to overstocking and excess inventory holding costs. Effective safety stock management is crucial for maintaining high customer service levels and smooth operations.
Economic Order Quantity (EOQ) is a fitting tool to add to these techniques as it helps determine the optimal order quantity that minimizes the total cost of inventory, including ordering costs and holding costs. The EOQ aims to minimize the total cost of inventory management, which includes factors like order costs, holding costs, and shortage costs.
EOQ shines particularly when deployed for managing safety stock. Safety stock benefits from the EOQ’s ability to calculate the most cost-effective amount to hold. In this scenario, EOQ helps balance the potential costs of stockouts against the expenses of maintaining extra inventory.
Additionally, the synergy of EOQ with other inventory control techniques like ABC Analysis can enhance its efficacy. For example, ‘A’ class items, due to their high cost and low quantity, may need a different EOQ strategy compared to ‘C’ class items, which are characterized by their low cost and large quantities.
However, it’s crucial to bear in mind that the power of EOQ is most effective under conditions where demand, ordering, and holding costs remain relatively stable. It might lose some of its effectiveness when these factors exhibit significant fluctuations.
When integrated into an inventory control system like Logility, EOQ can work in tandem with other features such as demand forecasting and ‘what-if’ analysis, resulting in a more comprehensive and adaptable inventory control strategy. This combination of techniques ensures that the inventory at hand is just the right amount to meet customer demand, all the while keeping costs to a minimum.
Embrace technology in optimizing inventory control. As supply chains become increasingly complex, inventory control techniques need to evolve in tandem, where digital tools play a pivotal role.
Advanced inventory control systems like Logility are designed to bring efficiency, accuracy, and agility to your operations. By automating many of the manual, time-consuming processes that come with traditional inventory control, these systems free up your team to focus on strategic decision-making.
These systems provide real-time inventory visibility, enabling you to track stock levels, sales, orders, and deliveries at a glance. Logility enables scenario planning, which allows you to run ‘what-if’ analyses. This helps business owners understand the impact of different business scenarios on your inventory, aiding in proactive decision-making. These simulations allow you to examine alternative plans and business scenarios’ cost and service level impact, see specific customer or product segments.
Beyond simple tracking, advanced inventory control systems use complex algorithms to analyze historical data and predict future demand trends. This helps you anticipate inventory needs, optimize purchasing decisions, and maintain an efficient supply chain.
Take a hard look at your segmentation strategy. Effective inventory control often relies on understanding the dynamics of your inventory—volume, velocity, margin, and other product and market attributes. With this understanding, you can better allocate resources and prioritize your efforts.
Automation is another critical aspect of optimizing inventory control. The ability to automate the update of inventory policies can save significant time and resources. This includes making broad-based changes or applying specific overrides at the lowest level of detail in the supply chain. Additionally, establishing and automating time-phased safety stock policies ensures your inventory levels are continuously optimized.
Finally, determining the optimal stocking location and the appropriate size of inventory buffers is essential. Logility uses sophisticated algorithms and predictive analytics to pinpoint these elements with precision. This capability ensures your inventory is strategically positioned, fostering operational efficiency.
Navigating the intricacies of contemporary supply chains calls for a paradigm shift from traditional manual methods to sophisticated inventory control techniques. You can create a more streamlined, precise, and adaptable inventory control mechanism by incorporating technological solutions, such as, Logility into your operations.
The path to perfecting inventory control is a continuous journey that demands a fusion of time-tested strategies and groundbreaking technology. By embracing digital transformation and continuously refining your inventory control strategies, you can unlock new levels of operational efficiency and drive business success.
Ready to dive deeper? Expand your knowledge by exploring Right Sizing Inventory in our Executive Brief Series, your go-to resource for mastering inventory control in today’s digital era. Let’s transform your inventory management together.