Inventory Control: Methods, Procedures, & Programs

Smartsheet Contributor Andy Marker on Jan 26, 2017

Several aspects of business aim to cut costs and reduce waste. Because inventory is such a sizable investment - of capital, but also of time, labor, and space - maximizing efficiency in this area is particularly important. Inventory control is a management style that seeks to eliminate inventory waste with the ultimate goal of increasing profits, and includes every step of the inventory lifecycle from supplier to storage to production line and shipment. In this article, we’ll dig deeper into the definition and goals of inventory control, explain the key aspects of a successful inventory control program, and look at some common hardware and software solutions. 

 


What Is Inventory Control?

Inventory control is a management system that seeks to maximize efficiency within an organization’s inventory cycle. Inventory control systems aim to find the “sweet spot” where a company can reduce its waste without decreasing profits (this is often referred to as the “inventory control problem”). Therefore, effective inventory control requires careful attention to and reporting of demand and production history, as well as the many aspects of customer satisfaction - from product quality to delivery speed. In essence, inventory control is about cutting as much as possible without sacrificing quality (and by extension, profit). 

While related, inventory control is distinct from inventory management. Inventory management is a high-level assessment and is used as a reporting tool for the entire inventory cycle. Inventory control, on the other hand, uses the information gathered by inventory management specialists and puts that knowledge into practice. So, while inventory management systems aim to understand and monitor a company’s inventory, inventory control systems are focused on eliminating excess (cost, labor, etc.) from the process to maximize efficiency. 

Inventory control is often talked about among larger business operations. These can include:

  • Supply chain management: This is the oversight of all materials and information throughout the entire production cycle - from supplier to manufacturer to consumer. Inventory control is related to supply chain management because it impacts the production line and is a large part of the overall production budget.
  • Inventory optimization: This is the balancing act of managing (and meeting) capital objectives with stock supply and consumer demand. Effective inventory control lessens the stress on optimization experts because they have accurate and reliable predictions for future production cycles.
  • Inventory forecasting: This is the science of determining future stock orders, such as amount of stock and reorder point. 
  • Stock control: While inventory and stock are often used interchangeably, they actually have distinct meanings. Stock refers to raw materials and the finished product a company will sell. Inventory, on the other hand, refers to all efforts (material, labor, time, and cost) that go into creating a product. The phrase “stock inventory,” therefore, is an umbrella term to describe both the production-cycle elements and the completed, ready-for-market products. 

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Aspects of Inventory Control

Inventory control can be a complicated process with many moving pieces. Here are a few items that specialists must consider when managing an inventory control program:

  • Loss prevention: As mentioned, eliminating waste is a key goal of inventory control. One way to reduce waste is to implement policies and procedures that prevent inventory loss. Since losing inventory directly affects the company’s bottom line, loss prevention is essential to a healthy business. The first step in implementing loss prevention tactics is to identify how your losses occur - either from internal (employee) theft or external factors such as a theft, break-ins, or other unanticipated events. While you cannot always control these events, you can create policies to better insure yourself against lost inventory. Of course, this relies on exceptional record-keeping (a switch to digital records can make this process much easier, faster, and more accurate). 
  • Tracking physical assets is another key aspect of inventory control. “Assets” can include raw materials, units at every point on the production line, and also shipped inventory. Knowing where each piece of your product is at every stage of production is an integral step in planning and managing your inventory. 
  • Reorder point: The reorder point (ROP) is the level of inventory at which the company orders new supplies. The most efficient organizations, however, use a formula to calculate the reorder point ahead of time, rather than waiting until inventory meets that level. While companies can add additional variables, the basic reorder point equation is: 

Average Daily Usage Rate * Lead Time (days) to Replenishment

  • Maximizing storage capacity is central to inventory control because companies need the correct amount of space to store inventory. Because physical space is expensive (rent, utilities, maintenance, etc.), companies need to maximize the storage capacity and include space as a variable in attaining the “sweet spot” desired by inventory control specialists. 
  • Limiting work in process (WIP) also helps reduce inventory investment. Not only does limiting WIP ensure faster, more reliable production, but it helps slow the entire supply chain so that teams don’t end up with a backlog of unusable material that goes to waste. To avoid this, many smaller-scale production lines choose to begin production on an as-needed basis. 

Additionally, the team responsible for controlling and managing your inventory will need a solid understanding of the amount and rate of finished product that you produce. To do so (and to inform many of your other procedures), you should calculate the following two amounts: 

  • Raw materials availability: Generally, this refers to the natural resources (oil, wood, metal, etc.) needed for production of your product, though it can include any materials pre-manufacturing. In relation to inventory control, a company must have the amount of raw materials that allow for continuous production without spending too much on storage (space and utilities) or generating waste. Therefore, it is recommended to order raw materials in small, frequent batches. 
    *Note: many suppliers prefer large, infrequent delivery cycles, so invest time in finding suppliers who will meet your needs to reduce both cost and physical waste. 
  • Finished goods availability: While reliable delivery can often positively affect a company’s revenue, overproduction can also lead to waste. Occasionally, investment in inventory itself will eclipse profit. Inventory control aims to limit the number of on-hand, finished goods so that manufacturers can save as much money, time, and effort as possible. 

While the above factors can be managed separately, they are all interrelated. Teams must not only communicate with each other, but also respect the sequencing of their production line. Make sure everyone understands the order and duration of each step so that your processes are well-organized and your calculations accurately forecast future cycles. 


Common Methods of Inventory Control

To help you synchronize the aspects of inventory control outlined above, there are several theoretical approaches. All of the following were designed to reduce waste, but have different concrete practices:

  • Just-In-Time (JIT) Delivery helps teams reduce waste by ordering and receiving inventory on an as-needed basis. This helps reduce inventory costs like storage and also decreases the chance of overstocking and material waste. While this system can save teams money, be careful of under-ordering, which can lead to stalls in the production line and untimely product deliveries. 
  • In a Fixed Quantity Control System, companies order the same amount of stock in every cycle (weekly, monthly, or yearly). This approach works well for teams with predictable inventory needs, but may pose difficulty for teams with fluctuating demand or a short history of record-keeping. 
  • The Minimum Stock method requires teams to determine a minimum level at which new stock is reordered. Rather than replenishing inventory based on a timeline or other production cycle cues, companies will simply order new stock when the inventory levels reach the pre-set minimum. This can be a reliable way to reduce waste, but make sure that your suppliers and delivery processes are smooth so you don’t have a gap in production. 
  • With Vendor Managed Inventory (VMI) some of the responsibility is outsourced. In this system, a company’s inventory supplier (vendor) takes full accountability for replenishing inventory levels based on the company’s demand. This can lessen the stress on the production company, but it’s best to create a system of shared risk (such as consequences for over- or under-stocking) so that both parties have an incentive to uphold their end of the bargain. 

It is important to note, however, that these are process-oriented methods, and therefore more related to your inventory management strategy. Still, how you decide to reduce waste in production will influence the way you choose to control your inventory. 


Inventory Control Solutions

With so many moving pieces, effective inventory requires an information storage system. This is especially true for companies who don’t have predictable production line schedules (order and ship dates, cycle duration, etc.), because your inventory needs will fluctuate along with your demand. The earliest inventory record-keeping was done by pen and paper, but this was soon deemed inefficient. Therefore, many companies turned towards more tailored technology to control inventory. 

The most common hardware solutions include:

  • Barcode scanners: Teams use barcode scanners to manually scan inventory. This helps record keepers account for material and track its location with a single code. 
  • Barcode printers: These function like scanners but have a printing capability. This can be useful for teams who have to physically label material or require hard copy records. 
  • Mobile computers: Teams who perform field asset tracking, but need more comprehensive functionality than a scanner can provide, will bring small computers with them to categorize, track, and manage raw material and other inventory. 

While hardware solutions are useful for field work and tracking physical inventory, they cannot perform the full range of functions necessary to run an effective inventory control program. As such, many companies have opted for software solutions because they are less labor intensive and more accurate, which ultimately saves companies time and money. Digital spreadsheets are common (such as Excel’s many inventory templates), as they provide a central hub for storing data and running formulas, but they don’t always provide the full scope of needs. Instead, many companies are choosing to implement software packages that include additional functionality like live updates and automation. 

Here are a few of the functions that software solutions can provide inventory control teams:

  • Stock locator database: Because software systems allow for real-time record keeping, you can get precise information on the location of any piece of stock at any time. Find the department, lot, storage, and bin numbers - as well as the current amounts of each item, instantly.
  • Grid coordinate numbering system: If your team already uses a grid system to organize your stock and supply rooms, you can apply the numbering system to your online records. Locate inventory quickly by filtering results in your online tool before hitting the stock room. 
  • Communications system: The highest-level tools sync your computer systems and control panels so that machinery, scanners and printers, and monitors can be activated by text entry or voice recognition. However, even lower-level apps lacking this functionality can help coordinate your various systems so there is only one record of the truth. 
  • Work and process order: Software tools can also help you standardize and streamline your processes. By keeping a more detailed and up-to-date tracking system, you’ll identify glitches or bottlenecks in your current systems so you can improve your sequencing to maximize efficiency. 
  • Materials Requirements Planning (MRP): This is a computerized system that creates production and inventory schedules based on production history. A MRP system can help with forecasting and ordering, but only if the records it pulls from are accurate. 

How to Choose a Software Solution for Your Business

As described above, software programs can help your team maximize efficiency by providing reliable record-keeping and around-the-clock access, streamlining processes, and saving time and money. However, it is important to remember that there is no “one size fits all” solution that will automatically solve your inventory control challenges, and you should research multiple options before implementing a system. 

There are three key questions to ask when choosing a software solution for inventory control purposes:

  1. What product types and quantities do you need to track?
  2. What features do you need?
  3. What is your budget?

Additionally, you should consider the following functionality when selecting a program:

  • Automation is one of the most critical features of an inventory control system, and the key aspect that sets software apart from offline, labor-intensive solutions. Look for a program that automatically alerts and reminds staff of inventory levels or key production deadlines so you can save time and stay on top of your processes. 
  • Real-time updates allow you to keep everyone on the same page. This function often comes in the form of cloud-based software that can be accessed anytime, anyplace and acted on by multiple users at once. 
  • Integrations: Look for a tool that integrates with both your existing business processes (i.e. doesn’t disrupt your workflow or pipeline) and with the other software applications you use. This way, your data can flow directly from one app to another without the risk of human error (from manual updates).
  • Task assignment will help you hold employees accountable. Many tools allow you to assign tasks to team members within the app (as well as set alerts and reminders) so you won’t have to rely on email chains or in-person meetings to inquire about status.
  • Scalability: Select a tool that can grow as your business does - there’s no point in investing in a program that will soon be outdated and inhibit your processes.
  • Usability will ultimately affect the success of your platform. A complicated user interface will end up costing you time, so make sure you select a tool that is easy to learn and use.

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