Inventory Control

Inventory Control Meaning

Inventory control is a process through which organizations ensure the availability of sufficient products and supplies with respect to consumer demands in the market. Carrying out this function helps firms to maintain adequate stocks, thereby avoiding shortages and overstocking of items.

The manufacturing companies maintain the inventory or stock to fulfill the demands of the interested parties in the market. Also referred to as stock control, it differs from inventory management in terms of focus. While inventory management deals with forecasting the stock requirements and accordingly ordering them, inventory control is a part of it. 

• Inventory control is a part of inventory management, which deals with tracking the stocks so that manufacturers do not run short of them, leading to consumer disappointments.
• The data can be recorded and maintained either manually or by using the software and equipment that help in automatic tracking of the ins and outs of the items.
• Controlling the inventory saves a lot of money for manufacturing units, making them treat the inventory as investments, not a liability.
• Periodic and perpetual are two types of systems used by organizations for effective controlling of inventory.

How Does Inventory Control Work?

Inventory control ensures the availability of products and services to meet current consumer demands. If done right, it takes due care of the supply chain management (SCM), allowing effortless maintenance of the demand-supply network in the market. When organizations implement different ways of controlling the inventory, they ensure they always have a sufficient amount of stock available for customers.

With effective stock control measures, producers/manufacturers can achieve warehouse management efficiently. It helps them avoid a shortage of products and a last-minute rush to reorder.

Unfortunately, organizations sometimes overstock products and items, leading to wastage if the goods remain unsold. This, in turn, incurs huge losses for organizations. Also, manufacturers have to bear the cost of storage of the products regardless of whether the sale occurs. This is how inventory management and its proper control help producers and manufacturers save a lot of pennies, which they lose because of overstocking or stockouts.

Though organizations can keep control of stocks easily by implementing internal controls and production control measures, there are major businesses that never bother about tracking their inventory. This, in turn, leads to huge losses for them. However, if inventory control is taken care of, it can maximize profits through least investment in stock. 

An organization can ensure controlling inventory by maintaining records using various media. For example, it can either manually track the movement of stocks and their storage details, using a pen and paper or an Excel sheet, or get an inventory control software deployed to do the same.

Inventory Control Types

The inventory control system is broadly classified as – periodic and perpetual. The periodic inventory system involves regular manual counting of the stocks in the warehouse. There is no software product or inventory scanning procedure to be followed here. The businesses do not record the volume daily or frequently but have accounting periods decided beforehand to track the same. The tracking can be done based on either First In, First Out (FIFO) or Last In, First Out (LIFO) stocks.

The perpetual inventory system is the automated control system to keep track of the stocks. Organizations require equipment and software to implement this system of controlling inventory. They record the number of stocks coming in and going out efficiently through this system with minimal or no chances of error as no process is manual. The recording or tracking is facilitated using several technologies to ensure no mistake is committed while reflecting the quantity and prices of the stocks being moved in and out.

Firms have a barcode system, which is applicable for periodic and perpetual inventory control systems. A barcode is a picture with text or numbers unique for every item in the inventory. Scanning the barcode helps the systems and devices read the details and transfer the same to the centralized database. In short, the barcode feature updates the item information automatically in the system. 

Similarly, firms use Radio Frequency Identification (RFID) tags to track inventory smartly. Any movement of the stocks transfers the information stored in the electronic form to the database. This equipment can store more information than barcodes. The RFID tags are active in batteries and other devices that the manufacturing business units may use.

Best Practices

Manufacturing firms need to have an efficient system to control the inventory. This makes them implement multiple inventory control techniques. The first on the list is the real-time inventory tracking that helps them have the latest up-to-date records, making it the most accurate. As a result, they can depend on the details for effective, well-informed business decisions.

The next is the proper labeling, which keeps the centralized warehouse record in the database updated. The RFID system is one of the most significant ways of smart labeling and tracking stocks. 

Then comes the ABC analysis, the next best practice on the list. Here, the stocks fall into three groups – A, B, and C. 

• A lists the products in lower numbers but with the highest consumption values.
• B items are those that have a lower consumption value than A but more than that of the items in Category C.
• C comprises products with the lowest consumption value. Though the returns on these items are limited and the business risk associated is less, they are available in significant volume in the organization. 

Controlling inventory correctly helps organizations set their reorder points, which detects the time when they need to order more stocks based on their calculations. Of course, the companies must conduct regular audits to ensure the tracking is accurate.

Objectives

Inventory control helps achieve certain objectives. Controlling the inventory efficiently saves companies a lot of money. Due to overstocking and having to stock products that spoil over time, the cost of storage still remains the same to be borne by the firms. Storing the items in the warehouses calls for payment against utilizing the space. 

When an inventory control specialist operates the software, it tracks and records the ins and outs, keeping into account the volume of stocks and the durability of the items. 

As the process helps store the products in sound condition until their sale/purchase, it prohibits companies from having stocks that might turn scrap or obsolete in the upcoming days or months. When the control is in the hands of the manufacturers, having inventory in the warehouses will mean an investment, which would yield good returns on their sales and purchase. The demand and supply become efficient, thereby facilitating the production and distribution of the same.

Example

Company A, which is unable to keep track of the stocks left in the warehouse, runs out of stocks to meet last-minute demands. It happened consecutively for two months, given the sudden replacement of the person recording the data manually. As a result, the shortage or unavailability of the products from the market made their customers switch to other brands. 

In their annual meeting, the top management decides to have an inventory control system deployed in the firm. It should automatically update the software as soon as a product goes out of the storage unit. As a result, they will have the latest details updated on their centralized databases. Thus, they deployed the RFID system for a regular labeling system to avoid errors. 

Thus, the database reflects the updates automatically as and when the products enter and exit the warehouse. Hence, they could track the right numbers of stocks for them to decide when to reorder and never witnessed stockouts ever again.

Benefits

Let us have a quick at the advantages of inventory control below:

• Organizations can save storage costs by predicting how much stock they require to keep to meet current consumer demands.
• There are no issues of overstocking or stockouts.
• It improves the liquidity position of an organization because it reduces excess stock holding, and there’s no blocking of working capital to cover up inventory losses.
• It saves workers' time as they don’t need to randomly search for the required material. The products are preserved in a specific place. 

Frequently Asked Questions (FAQs)

Recommended Articles

This article is a guide to what is Inventory Control & its meaning. Here we explain the system along with its techniques, objectives, benefits & example. You can learn more about finance from the following articles –

• Valuation of Inventory
• Inventory Financing
• Inventory Shrinkage
• Inventory Excel Template
• Full Form of FIFO