What is inventory control? Its objectives, methods, and how to do it.

Inventory control or stock control determines your order fulfillment, profits, and dead stock. Let’s see how.

October 12, 2020

Inventory control. cover

So you’re running a distribution center or a manufacturing line. You’ve figured out your suppliers and customers. But have you thought about everything in between? Yes, I’m talking about inventory control, something that can drastically affect your profits and customer retention if left unchecked.

Inventory control starts from the moment stock enters your warehouse till it leaves for shipments. Traditionally, inventory control was limited to few actions like checking your warehouse quantity and managing it to fulfill orders. Today, with the wide range of available software, it also means quality control, setting reorder thresholds, automatic stock replenishments, tracking items with barcodes, SKUs, and so on. By implementing an efficient inventory control system, you can optimize your stock to cut on what doesn’t sell and procure more of what sells fast.

In this blog, let’s understand everything from what is inventory control, its objectives to how to do it.

What is inventory control?

Inventory control refers to the use of techniques to control inventory in warehouses to minimize stock in hand while fulfilling customer orders on time. Various techniques like quality control, ROP, barcode scanning, forecasting, etc., are used in an inventory control system. A major part of it is controlling the quantity of stock items.

What does inventory control depend on?

Let’s see the parameters that affect inventory control.

  • Item lead time
  • Shelf life of perishable items
  • Seasonal inventory items
  • Customer demand
  • Available storage space

Inventory control objectives

We’ll talk about inventory control in more detail soon but before that, let’s see what are the objectives.

1. Minimize carrying costs

To avoid stockouts, every business maintains a small surplus of materials known as safety stock. But there needs to be a balance between not having enough stock and having too much stock. Some companies go just in time (JIT) to avoid facing this situation altogether. But if you business doesn’t allow a JIT model, using proper inventory control can help set correct automatic replenishment models so that excess inventory doesn’t result in higher carrying costs.

2. Maintaining optimal inventory levels

This means having just the right quantity of items at all times. Not low enough that there’s shortage and lost sales but also not high enough that there’s idle inventory. To avoid stock outs as well as lost sales means having an efficient reordering system setup that orders just the right (or close enough) quantity of inventory items. This is done with software which takes into account relevant parameters like threshold, lead time, demands, and safety stock.

3. Ensure stock availability

Having the right inventory levels doesn’t end with problems like stockouts and surplus. For a manufacturing company, there’s a risk of production halting because of raw material or subassembly shortage. So, another objective of inventory control is to ensure a steady supply of raw materials and subassemblies (manufactured or outsourced) without interruptions for fulfilling manufacturing orders on time.

4. Prevent wastage

Inventory waste happens in two cases—either the stock is defective or the stock has expired. It also happens when stock is idle and there’s no market demand. To prevent defective stock from entering your warehouses, exercise quality control and to prevent dead stock or accumulation of expired items, systems should be set properly so that they don’t order too much.

5. Maximize profitability

Poor inventory control impacts profits negatively. This is not surprising once you realize that one of the other objectives is to avoid stock wastage. Not only that, but poor inventory control also means low availability of items where required, be it manufacturing orders or distribution activities. If the orders are not fulfilled on time, customers won’t be happy. Hence, good inventory control results in good profits in two ways—avoiding money locked in excess inventory and boosting sales by keeping customers happy.

So we can say that setting up a proper automatic replenishment system is a big part of inventory control.

Inventory control methods

Let’s talk about inventory control methods, techniques, and formulas. As we already know, today, it's a lot more than simply counting stock.

1. Quality assurance

Inventory control also means controlling the quantity of stock items. Regular quality inspections when the stock enters and exits warehouses should be mandated. Over time you’ll find suppliers that consistently send quality materials. In case of a manufacturing business, you should consider incorporating concepts like lean and six sigma to increase quality and reduce defects.

2. Reorder point formula

A reorder point is the minimum amount of inventory quantity reached at which point it’s time to reorder stock. In simple terms, it’s the quantity threshold at which more stock needs to be ordered. Now, a reorder point formula calculates this point. You’d think if it’s just a threshold number, why bother with a formula? Because there’s one more parameter accounted for reordering—lead time. So the reorder point formula becomes:

ROP = Demand during lead time + Safety stock

Where;

  • Demand during lead time = Lead time x Daily average sales
  • Safety stock = (Maximum daily sales x Maximum lead time) - (Average daily sales x Average lead time)

Note that in the formula for safety stock, maximum daily sales and average daily sales can also be called usage/orders, the important thing to note here is that this is the quantity that leaves your warehouse every day. So keep that in mind to avoid any confusion.

3. Safety stock

To avoid any doubt, let’s also understand what safety stock is. In an ideal world, you’ll procure goods and use them. But this rarely happens, natural disasters strike, goods get lost, negligence happens, and so on. So, you should never really order the exact amount of goods needed, you need a small surplus—safety stock.

This also introduces carrying costs which you should account for when selling goods.

4. Inventory forecasting

Forecasting demands and adjusting inventory levels is important to avoid problems like wastage and dead stock. Needless to say, you’ll need more than spreadsheets to do this effectively. Parameters like current stock usage, sales orders, shelf life, etc., are taken into account for inventory forecasting.

Inventory control vs inventory management

Although they sound similar, inventory management is a broader concept that encompasses everything from stock procurement to selling it to the customer. Inventory control is more about maintaining efficient inventory quantities in warehouses, to prevent overstocking, understocking, and idle inventory.

Inventory control system (ERPNext)

Let’s see the different inventory control parameters and techniques in action with software. Consider this an example of inventory control driven by ERPNext.

Before getting into inventory control, you’ll choose the best suppliers and procure the required items in the early days of your business. A few weeks in is where you’ll have to think about inventory control problems like automatic replenishment, projection, automating stock transactions, shelf life, etc.

1. Quality control and inspection

Every item or batch that enters your warehouse should be inspected before being accepted. You can set the parameters for different items based on what qualifies good vs defective units. In the below example, for a medical syringe, we’ve demonstrated parameters like needle sharpness, damages to body, etc.

Quality inspection

To enable this in ERPNext, go to the item form and enable the inspection required options. Quality inspections can happen when receiving items to your warehouses and also when it leaves your warehouses for delivery.

Item inspection

2. Scanning barcodes for auto update

After a point, using barcode scanners is easier than manually entering stocks. In stock entries and purchase/sales transactions simply scanning the stored barcodes will automatically update the quantity in your transaction.

First, you need a compatible barcode scanner connected to the computer/laptop.

Then, you need to ensure that the UPC/EAN code is stored in the Item master. Scanning will not work if the code is not stored. But don’t worry, you only need to store this once for each item.

Item barcode EAN

Now, simply use the barcode scanner and the item count will be updated in transactions.

This also works with smartphones where you can use your smartphone’s camera to scan the barcodes. Note that this can be slightly slower depending on the phone you use.

3. Warehouse account to know profits

To maintain company wise stock balances, every warehouse must belong to a company. To enable this, every warehouse should be linked to a general ledger account.

By creating a ledger account with the same name as a warehouse, you can directly track all profits and losses tied with that warehouse.

To do this, create a GL account under the appropriate group account. Then, link the newly created warehouse to the warehouse of the same name. In the following example, the warehouse name is “Chawla Traders” which is linked to the account “Chawla Traders”.

Warehouse account

4. Projected quantity

By using different stock reports in ERPNext, you can understand various aspects of your inventory. In the context of inventory control, let’s see a few of them.

The item shortage report gives details on actual quantity, ordered quantity, reserved quantity, and projected quantity.

Item shortage report

For a quicker view, the stock summary shows the reserved quantity and actual quantity of different items.

Stock summary

5. Reordering

By setting a reorder threshold for an item, you can allow ERPNext to automatically generate Material Requests when the threshold is hit.

In the following example, the auto reorder feature will do the following:

  1. Check quantity in All Warehouses
  2. Request new items for Stores and Stores 2 (since there are two rows)
  3. When reorder level is 10 and 5 respectively, order 5 and 2 items
  4. The method for procuring the new items is ‘Purchase’, it could be other types depending on whether you buy or make the items

Item auto reorder

The Itemwise Recommended Reorder Level report in ERPNext shows all the details you need like safety stock, lead time in days, consumed quantity, delivered quantity, total outgoing, average daily outgoing, and finally the reorder level set in the item form. From this report, you can also gather which items sell more i.e., the ones you should procure more of and the ones that don’t get sold so you can consider scrapping them from your warehouses altogether.

Itemwise Recommended Reorder Level

6. Stock shelf life

Another important aspect of inventory control is shelf life. If you store items that have an expiry date associated with them, this should also be factored into the decisions you make.

In ERPNext, see the stock ageing report to understand which items are close to expiry.

Stock ageing report

You can also group items in batches which have their expiry dates. This way, you can use the materials closer to their expiry date and avoid wastage.

The Batch Item Expiry Status report shows the expiry date of items with batches.

Batch expiry

Conclusion

Just like we discussed, we saw how inventory control is directly linked to better revenues and business growth. By making use of the right data and some software, you ensure always having the right amount of inventory thereby reducing carrying costs.

In this blog, we first understood what inventory control is, it’s objectives, then we saw the methods used. We briefly touched on how inventory control is different from inventory management, and finally saw how to use software to control inventory with advanced features and reports.

Prasad Ramesh
Prasad Ramesh
"Writer at Frappe."
1 comment
Deepak Nagar October 19, 2020

@Prasad

Would appreciate if you create content on Demand Driven Materials Requirements Planning.

Check out website of Demand Driven Institute.

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