This guide provides everything you need to get started on inventory control. The easy-to-understand expert advice, guidance, formulas, methodologies, policy development and software guidance will help any business—large or small.

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What Is Inventory Control?

Inventory control, also called stock control, is the process of ensuring the right amount of supply is available in an organization. With the appropriate internal and production controls, the practice ensures the company can meet customer demand and delivers financial elasticity.

Successful inventory control requires data from purchases, reorders, shipping, warehousing, storage, receiving, customer satisfaction, loss prevention and turnover. According to the 2017 “State of Small Business Report”, almost half of small businesses do not track their inventory, even manually.

Inventory control enables the maximum amount of profit from the least amount of investment in stock without affecting customer satisfaction. Done right, it allows companies to assess their current state concerning assets, account balances and financial reports. Inventory control can help avoid problems, such as out-of-stock (stockout) events. For example, Walmart estimated it missed out on $3 billion worth of sales in 2014 because its inadequate inventory control procedures led to stockouts.

An integral part of inventory control is supply chain management (SCM), which manages the flow of raw materials, goods and services to the point where the company or customers consume the goods. Warehouse management also squarely falls into the arena of stock control. This process includes integrating product coding, reorder points and reports, all product details, inventory lists and counts and methods for selling or storing. Warehouse management then synchronizes sales and purchases to the stock on hand.

Inventory management is a higher-level term that encompasses the complete process of procuring, storing, and making a profit from your merchandise or services. While inventory control and inventory management may seem interchangeable, they are not. Inventory control regulates what is already in the warehouse. Inventory management is broader and regulates everything from what is in the warehouse to how a business gets the product there and the item’s final destination.

Inventory control practices and policies should apply to more than just finished and raw goods. The following graphic shows all the things a business might manage using these practices.

The Reach of Inventory Control: Beyond Finished and Raw Goods

Which of the following controls can minimize the threat of mistake in counting incoming inventory?

This graphic shows the different aspects of inventory control in a business.

Why Is Inventory Control Important?

Inventory is one of the biggest costs of capital of any product-based business. If you look at the balance sheet of this type of company, you’re likely to find that inventory makes up a large portion of current assets and uses up a lot of working capital.

Inventory control helps avoid the many costs related with buying too much inventory and the strains of going without the needed inventory. While some companies using just-in-time ordering may carry extremely small inventories, nearly any business requires some form of inventory, which is best managed through inventory control systems.

If a company can lower inventory, it may find new funds available for expansion or profits. If a company needs to carry more inventory and tight inventory control processes bring inventory levels up, the business could find higher sales, and again higher profits. Using inventory control to optimize your warehouse, stock room, supply room, or storefront is a sure way to cut costs and better manage any kind of product.

How Inventory Control Can Improve Your Business

Implementing proper inventory control procedures can help ensure a business is running at optimal financial levels and that products meet customers’ needs and expectations. According to the 2015 “Global State of Multichannel Customer Service Report”, 62% of customers have stopped doing business with a brand whose customer service was poor. Of those customer service complaints, frustration over out-of-stock or backordered items is high on the list. In fact, research about convenience stores shows that out-of-stocks could cause a store to lose one in every 100 customers completely. Additionally, 55% of shoppers in any store would not purchase an alternate item when their regular product is out-of-stock. Other areas where businesses incur expenses or lose sales that inventory control practices and methods could address include:

  • Spoilage
  • Dead stock
  • Excess storage costs
  • Cost-efficiency
  • Decreased sales
  • Losing loyal customers
  • Excess stock
  • Losing track of inventory
  • Losing goods in the warehouse

According to David Pyke, co-author of Inventory and Production Management in Supply Chains, now out in its fourth edition, and professor of operations and supply chain management at the University of San Diego, “owners of small and emerging businesses would be stunned to see how much help they can get and money they can save by wisely managing their inventory. Many small businesses are not rolling in cash, and much of their funding is tied up in their inventory. Good practices balance customer demand and management of inventory in the smartest possible ways.”

Tips and Expert Advice for Getting Started With Inventory Control

Fully exploring the intricacies of inventory control procedures and theory may be a lot for some businesses. The tips below can help you identify what you need to do before implementing a new inventory control process:

  • A Good Inventory Control Plan Has Several Key Essentials: Purchasing a software system that addresses your warehouse stock is not enough. A good inventory control plan addresses your orders from production or purchasing to selling the items and ultimately removing them from your books. An inventory control program should account for things like reducing wasted warehouse space, ordering supplies using a forecasting formula and setting up vendor relationships.

  • Plan First, Then Execute: Any manager worth their salt will tell you that inventory management and control are continuous and do not live just at the warehouse level. You should continually update your plan, then put it into practice. You should be tracking metrics and updating your forecasts for future months weekly and making changes to your stock management planned as needed. You may also be required to change your inventory management plan based on world events.

  • Ensure You Always Have Critical Stock: Whether it’s machine parts or an item that is the backbone of sales, determine which stock is critical, and ensure those items never go out of stock. For this, you should have an inventory control process in place.

  • Carefully Review All Shipments: A key point of inventory loss occurs when your business initially receives an item. Closely review packing slips and products for any damage.

  • Appoint the Right Inventory Management Team Members: Staff buy-in is crucial, but make sure those assigned to own the inventory control processes are the right people for the job. Math should be among their strengths, and they should have time to perform the task correctly. Ideally, your inventory management team includes people that touch each stage of the process, from warehouse managers to procurement specialists to pickers on the floor. Smaller businesses should consider including all managers and some front-line staff representation.

  • Group Like Items: As much as possible, group like inventory in the same areas. Further, unique products should have a single storage location.

  • Find the Balance Between Inventory Costs and the Benefits of Having Stock on Hand: Developing a truly effective inventory control system relies on finding that right balance between the cost of making and storing product and avoiding stockouts. Your business’s money is tied up in that stock. Fortunately, getting to know your business enough will enable you to choose the right methods and forecasting techniques. You are looking to determine the total cost of your stock, including factors like warehousing costs and perishables, and weighing that against the demand and the cost of stockouts to give you the right balance

  • Look at Other High-Level Plans: If you do not have positive control over your inventory, you probably need to address other areas of your business. Do you have an adequate quality management plan? Have you looked at your facility management plan lately?

  • Choose a Scalable System: It is tempting for small businesses to order software systems that are one-size-fits-all or, conversely, free or low-cost. Cloud-based systems can grow with a business and provide the analytics you need to continue your business’s growth.

  • Your Software Is Only as Good as Your Processes: Software cannot solve bad processes, just automate them.

  • Have a Backup Plan: No matter how high tech the software or well thought out the process, ensure that your business has a backup plan for power outages and theft. Cloud computing is always a better option than a local server.

Actionable Advice From an Inventory Management Expert

Which of the following controls can minimize the threat of mistake in counting incoming inventory?

Inventory control expert Dr. Pyke advises, “It’s been my observation that the business world has a weak understanding of inventory management and control. They are trained shallowly, and sometimes they apply only shallow experience to their practices. Sometimes, that works out great. In my 30 years of experience, however, I have seen that a lot of money can be saved by training and managing inventory control in-depth.”

“Like Toyota’s Kanban system for optimizing setups, there are obviously areas that we can make flow better. Companies should be proactive in their sequencing system, rather than reactive—all while making that balance. If you look at the underlying mechanisms during planning, you can go from there. The system you choose can vary dramatically depending on the situation and can make all the difference in your actual performance.”

How to Control Your Inventory

At its core, taking stock is just the process of determining what you have and where you store it so that you can evaluate it. Not all warehouse control procedures are ideal for every business or for the varying stages of an organization’s growth and development. Some methods are too complicated, especially for smaller companies.

4 Typical Ways to Control Inventory

You should be able to use your system to track inventory levels, create orders and send out stock. Some basic systems for tracking inventory include:

  1. Manual: Whether via a ledger or a stock book, manually logging inventory with a pen and paper is the simplest way to track what comes in and goes out. Small businesses with few items can get away with using this type of system. This system can be challenging because it is an actual record that you cannot mine and use for planning purposes.

  2. Stock Cards: A slightly more complex method uses stock cards, also called bin cards. A stock card is a table that records the running unit price, sale price and inventory count of each product. Use individual cards for each product in large warehouses or stock rooms. The system also tracks purchases, sales, returns and other reasons to withdraw stock, such as promotional withdrawals. You can include additional notes on the stock card, such as any problems associated with that item. For a stock card system to be effective, consistent updates are critical. You must also record unusual stock pulls; otherwise, you run the risk of inaccurate data. 

  3. Simple Spreadsheets: Many companies, especially small businesses, use spreadsheets to track inventory. Whether they use Microsoft Excel or something similar, spreadsheets are a way to start automating and electronically capturing product data. With consistent updating and basic coding, you can ensure that you have available current stock levels and statistics. Businesses quickly customize these systems to meet their needs. Since everyone who builds a spreadsheet does so slightly differently, users will need intimate knowledge of how the sheet works. This method is also thought of as manual because the only way to automatically update the spreadsheet system is by adding high-level macros or coding that connects them with other systems.

  4. Basic Inventory Software: Simple inventory software is usually low cost and targeted to small and medium-sized businesses. This simple automation is often cloud-based and ties into your point of sale software, so it can generate real-time, automatic stock updates. You can also incorporate analytics and reporting and run cost comparisons, create reorders, identify best and worst-selling products and drill down to order details or customer patterns. Some simple inventory management software systems can scale to more complex functionality as your business grows.

Some businesses prefer to stick to the simple systems of keeping track of inventory. Other companies plan for growth and scaling. You could also track inventory with:

  • Advanced Software: Designed for tracking inventory, most of these targeted software solutions can integrate with existing software, are scalable and provide analytics and templates. Advanced software is now in reach for many small and midsize businesses because it is no longer cost prohibitive.

Types of Inventory Control Systems

Inventory control and monitoring systems are accounting approaches to track the number of goods on hand. Big companies often monitor inventory across stores, warehouses and even websites. The two main systems are periodic and perpetual tracking systems.

The Periodic System vs. the Perpetual System

Which of the following controls can minimize the threat of mistake in counting incoming inventory?

This graphic shows periodic and perpetual systems as a calendar.

The Periodic Inventory System

Most small businesses still use periodic inventory management because it does not require sophisticated software or inventory scanning. A periodic inventory system relies upon occasional or regular physical counts of the inventory. You decide accounting periods based on the business needs, but you don’t track inventory daily or continuously. Instead, you record all purchases to a purchase account. Once you conduct the physical inventory, you shift the balance in the purchase account into the inventory account. Finally, you adjust the inventory account to match the cost of the ending stock. You can calculate the cost of ending inventory using either FIFO (first in, first out) or LIFO (last in, first out).

The challenges of the periodic system are especially apparent when performing a physical inventory count. Most normal business activities must be suspended during this time because it requires significant manual labor. Many companies hire additional staff and try to perform this outside of regular business hours, such as during a night shift. This type of system incurs more fraud because there is nothing tracking inventory between physical counts, reducing accountability between inventories, and because it is more challenging to determine where any inventory discrepancies occurred.

The Perpetual Inventory System

The perpetual system may be more expensive to implement than the periodic system due to equipment and software needs. However, the system continuously and immediately updates inventory numbers. This system calculates inventory based on sales and purchases via the point of sale and asset management software. This way, you have accurate stock on-hand accounting at all times. Perpetual tracking is the best way to avoid stockouts when your customers deplete inventory on a particular product. With a perpetual system, you can achieve minimal employee contact with the goods.

The challenges of this type of system occur when you use it without also performing physical inventories. In other words, the recorded inventory may not accurately reflect what is physically in-stock as time goes by, never mind accounting for drop shipments or inventory on order. You must account for breakage, stolen goods and loss to ensure the system is accurate. Further, errors and improperly scanned items affect the inventory records. You can handle this mathematically by applying corrections that mostly account for these things. Experts agree, though, that even though physical inventories are not common, you should implement some manual stock taking process to complement a perpetual system. You can integrate these types of systems with supply-chain automation to make quicker decisions informed by data.

Barcodes

Barcodes can be part of either a perpetual or periodic inventory system. Some may consider the barcodes part of an inventory management system, but in truth, this is equipment that falls under your existing stock management system. A barcode is essentially a little picture with text or numbers that gets put on each stock item. The text or numbers store a large amount of information. A scanner reads that information and transfers it to a database, which tracks the parts and their locations. The system performs scans when the new product arrives and when it is issued out. Barcodes have a rapid return on investment (ROI) by lowering operating expenses once implemented, even for small businesses.

Other benefits of barcoding include:

  • The elimination of manual data errors
  • Faster collection of inventory information
  • Automatic inventory updates
  • Streamlining of documentation and reporting
  • Enabling inventory movement between multiple warehouses and departments
  • Easy and quick identification of minimum levels and reordering of necessary levels

Implementing barcodes on inventory is a smart idea because they offer scalability and accuracy, even to small and growing businesses.

Radio Frequency Identification (RFID)

RFID tags are also a type of equipment that falls under an existing inventory management system. RFID tags are a type of smart tracking. RFID tags contain electronically stored information, more information than is possible with conventional barcodes. Tags can be passive or active: Active RFID tags include batteries, whereas passive tags do not have batteries. The RFID reader supplies the power for passive tags through radio waves, whereas active tags send out their radio waves. Both types of tags automatically update to identify the stock and capture any associated data.

RFID tags are an effective way to protect high-value items and products that require additional security compliance, such as pharmaceuticals. Active tags are the best course in businesses where inventory security has been an issue.

Although security is the primary benefit of RFID, other features include:

  • Remote Tag Reading: The reading range for passive tags is approximately 40 feet, and the range for active tags is 300 feet.
  • Simultaneous Tag Reading: The system can read several tags simultaneously so that it can check in an entire pallet of products at once.
  • Unique Tag Codes: To track unique products, not just one type of product, you can give tags unique identification codes.
  • Constant Updates: Without having to update the physical tag on the item, you can send it updates such as warehouse location via your active tag or by keeping the passive tag system activated.

Some challenges with using RFIDs include:

  • Passive RFID tags require scanners or handheld readers.
  • The cost can be prohibitive for some businesses.
  • The supply chain also needs the equipment necessary for RFID tags.

If you are considering using RFID tags, they have become cheaper in recent years. Experts say the best use of RFID tags is to place them at high-risk points close to your stock, such as at exits. Finally, for products with a limited shelf life, an RFID system can provide information to ensure quality control, such as when they were brought in and their expiration dates (if relevant).

A recent trend among small businesses is the use of QR codes, which are like barcodes, but you don’t need to buy expensive equipment to read them. You can install an app on a smartphone that reads QR codes. They also carry more information than a barcode because of their matrix-like patterns. QR codes are not active systems like active RFID tags and not nearly as expensive.

Inventory Control Methods

Inventory control methods are the ways you use your business’s strengths and relationships, your expertise, formulas and forecasts to determine how much supply you keep, sell, store and order. Effective inventory control balances controlling costs and meeting customer demands.

A company’s days of inventory outstanding (DIO) measures how many days a company holds stock before selling it. The DIO is an efficiency measure because product stock ties up funds. The lower the DIO the better, especially for a small business. DIO scores have increased in the past five years by 8.3%, meaning that companies have poorer inventory control practices. Additionally, there is a need to increase warehouse space, which means…

The Correlation Between DIO and Warehouse Space

Which of the following controls can minimize the threat of mistake in counting incoming inventory?

This graphic shows correlation. As DIO and Warehouse Space Needs increase, Inventory Control decreases.

7 Top Inventory Control Best Practices

The most effective inventory control methodology can vary between companies. Whichever methodology you choose, it should be clear to employees and have well-defined policies and procedures. If you use software with your methodology, look at systems that boast the key features your company needs, not just a one-size-fits-all package. Organizational control starts with labeling items, whether via SKUs or a more complex system. Quality control requires having quality standards and policy for staff to follow.

  1. Choose a Management Improvement Methodology: Management improvement methodologies involve more than just inventory control. You can improve your business, from top to bottom, with a management methodology that you commit to. Examples include Kaizen, Lean and Six Sigma.

  2. Optimize Purchasing Procedures: One of the hallmarks of proper inventory management is ensuring that you use data and forecasting to control your purchasing procedures. This also includes identifying items by monitoring customer demand, removing obsolete stock and adjusting safety stock and reorder points.

  3. Manage Supplier Relationships: It is critical to manage supply chain relationships well because you can often head off and solve problems by working closely with suppliers. For example, suppliers can offer your business a negotiable minimum order quantity, take back products that are not selling and help you quickly restock when sales accelerate for a specific product.

  4. Create Automated Reports: Since inventory control and management systems produce massive quantities of data, businesses need to find ways to analyze, report and use this data. Many systems automatically generate reports for inventory status, stock logs, reconciliation, historical stock, aging inventory and inventory financials. Further, companies should decide at what point along their supply chain they should share these reports, so suppliers can adequately prepare.

  5. Conduct a Risk Assessment: Problems regularly crop up in businesses, whether you have an unexpected sales spike, a cash shortfall, not enough warehouse space, an inventory miscalculation, slow-moving products or discontinued products. Prepare a risk assessment matrix to determine what your worst risks are and how you can address them when they occur.

  6. Regularly Audit: Conduct regular audits to ensure that your actual stock and reports line up. There are three ways to perform an audit: physical goods, spot checking and cycle counting. A physical inventory requires counting all your inventory and should be performed at least annually and often at the end of the year to line up with income tax reports. Spot checking is when you choose a product or two at a different time from the full inventory, physically check it and compare it to what is in your documentation or software system. Problem or fast-selling products are ideal for spot checking. Cycle counting spreads out the reconciliation throughout the year. Each product has its audit period, but you should check high-value items more often. For more information on cycle counting, see “Using Inventory Control Software for Cycle Counting”.

  7. Selective Inventory Control (Forecasting): Many techniques fall under selective inventory control and management or forecasting, such as ABC analysis. In this form of analysis, you classify the inventory with one of the following: usage value, procurement source, procurement difficulty, seasonality, unit price and rate of consumption. Choose a formula based on the relative importance of each classification and how much it affects the stock.

Management Methodologies Used in Inventory Control

Many inventory control and management methodologies are relevant to all industries, whether you are a shoe retailer or a big oil company. The different management methodologies:

  • Lean Manufacturing: Lean manufacturing is a high-level management philosophy that delivers customer value through driving manufacturing efficiency. Lean manufacturing also uses Kanban, a basic, scalable and visual scheduling system. Workers can visualize all tasks in a project under one of the headings: To Do, In Progress and Done. This process highlights any bottlenecks or backlogs by their lack of movement from one column to the next, so you can address them.
  • Six Sigma: Among the most well-known management techniques is Six Sigma. The methodology’s intent is to reduce the probability that errors or defects will happen using the continuous process improvement techniques of define, measure, analyze, improve and control (DMAIC). Falling back on these basic management principles, practitioners can work with Six Sigma and other inventory control methodologies to decrease issues like stockouts and improve on-time production and delivery.
  • Lean Six Sigma: Combining Lean and Six Sigma, this technique focuses on waste-reduction and product defect-reduction. Lean Six Sigma is especially useful for finding and eliminating root causes of supply chain and inventory management waste. Using the combination of techniques, you can find ways to make improvements such as reducing inventory costs and improving your stocktaking process.

Methods to Replenish Stock

There are many ways to control stock, whether you use techniques that specify when to order, forecasting formulas or selling and storing techniques.

8 Ways to Control Stock

Ways to control stock by when or how you order goods or materials include:

  1. FIFO and LIFO: These are methods of placing value on the products. LIFO assumes that the goods last added to the inventory are the first goods to be sold, while FIFO assumes that the goods first added to the inventory will be the first sold.

  2. Min-Max Inventory Control: This theory sets minimum and maximum levels of stock to maintain specific items in your inventory. So, when you get to the minimum level of stock, order only enough to reach the maximum level set. Critics of this approach say that you may end up with either too many or too few products.

  3. JIT Inventory: The just-in-time (JIT) inventory management strategy lines up the raw material order from suppliers with the production schedule. You decrease waste in the form of inventory cost because the goods are onsite only as needed. JIT can be a step in Lean manufacturing by slightly requiring JIT to incorporate what the customer wants in each product manufactured. The risk with this method is running out of stock due to inefficient suppliers, but supplier relationship management can somewhat mitigate this risk.

  4. Two- or Three-Bin System: A two- or three-bin system involves two containers of the same stock item. When one container becomes empty, you use the second container (the backup), which then identifies the reorder point (ROP). The ROP is when inventory gets down to a level that initiates stock replacement activities. The problem with a method this basic is evident in situations where there are big or fast orders. You may never be exactly sure how much product is in stock at a given time, so you may not be able to predict whether you can fulfill a large order or quick, successive orders.

  5. Fixed Order Quantity: In a fixed order quantity rule, you may only order a specific amount of an item at one time. With this rule in place, reorder mistakes, storage space issues and unnecessary expenses are kept to a minimum. You may link fixed order quantities to automatic ROPs.

  6. Fixed Period Ordering: In a fixed period ordering rule, you link the replenishment of specific items to a particular interval. In this case, the order quantity is always different to compensate for customer demand.

  7. Vendor-Managed Inventory (VMI): In this method, it’s often the sales representative that manages the stock on specific products, noticing and ordering what needs replenishment. For example, a beverage company representative who performs deliveries reviews the stock and space available for their products in the store and replenishes it themselves.

  8. Set Par Levels: When inventory drops below the par levels, your software should signal you to order more. Par levels vary by product, relative sales rates and the time to restock and require research and sound decision-making. Par levels change over time and must be reset at regular intervals. On the positive side, having minimum levels makes your business more efficient and flexible. When new products hit the market, you can purchase them because your funds are not completely tied up in existing inventory.

    Further, storage costs are lower, and if your business moves fast, having only the minimum levels of stock may be more suitable. Some challenges you may face include possibly running out of stock, when ordering the minimum could be more expensive and the variability of how well your suppliers can deliver products quickly and efficiently. You should also have a safety stock alongside your minimum inventory. Safety stock is the stock you keep in excess in case there are delays in delivery. You use this stock only in case of emergency.

Which of the following controls can minimize the threat of mistake in counting incoming inventory?
This chart shows different ways to control stock when you order goods or materials.

Stocking Methods How Who/When
FIFO, LIFO Categorize current sales as going either FIFO or LIFO FIFO - industry where goods are perishable, especially
LIFO - any business with rising costs (for accounting)
Fixed order quality Only specific quantity of item can be ordered When the industry costs are stable
Fixed period Item only ordered at a certain time When demand fluctuates
Vendor managed inventories (VMI) Vendor manages your stock When the market demand fluctuates and the goods are perishable
Min-max Set min and max quants for each item New or small businesses who want to keep it simple
Just-in-time (JIT) Goods only onsite when they're needed More experienced practitioners and businesses comfortable in their industry
2-3 bin system 1 container always in use, 1-2 containers alwats full For small parts that are small volume that can be resupplied quickly
Set par levels Order when minimum of items reached All businesses

This chart shows different ways to control stock when you order goods or materials.

Control Stock With How You Sell It

You can also control stock with how you sell it. In some cases, the stock is not even a part of your onsite inventory, but you can still control it. Here’s how based on when or how you sell your products:

  • Bundling: Combining goods or services to offer the customer extra value for one cost is called bundling. In inventory control and management practice, bundling is a way to move aging inventory. For example, you include a surprise free gift or offer a reduced price on another item based on a purchase. These techniques also improve your customers’ experience.

  • Rolling Inventory: When inventory is rolling, instead of storing goods inside a warehouse, managers leave it in the truck trailer and store that trailer in the warehouse parking lot. A driver can hook up the trailer when the stock is needed and drive it to the retail store. Warehouse employees never touch the inventory.

  • Drop Shipping: Also known as cross-docking, drop shipping is when a manufacturer or supplier directly ships its products to customers on behalf of the retailer. The retailer never has the product in stock and never handles or sees the product. These businesses mostly work via internet sales.

  • Consignment Inventory: This business arrangement occurs when a company gives its goods to another company or storefront before they pay for them. The storefront or company pays for the products once it sells them, for an agreed upon percentage of the sale price. This arrangement can be an excellent situation for small businesses that are selling the products because their cost of ownership is minimal. 

  • Backordering: When a company decides to take orders and payments for products that are not in stock, they are taking backorders. For a small number of items (one or two), it is easy to process the order and inform your customer with a forecast of when you will fulfill it. Further, the higher the value of the item, the more patient your customers will be with backorders. Problems mount, however, when the backordered products start to multiply. It is not recommended that small businesses whose products are generally stocked on-site mix with many backorders. Positive reasons to offer backorders include increasing cash flow, adding some flexibility for small businesses not capable of handling the logistics and lower holding and overstock costs. Challenges of backordering include possibly disappointing customers, longer fulfillment intervals and other logistical requirements.

Stock Control Methods by Selling or Storing Techniques How Who/When
Consignment Inventory Payment after another business sells your products Retailers of big-ticket items, low cash flow
Branding Combining goods for a discount To impress your customers, use up obsolete stock, for discounts
Drop shiping Manufacturers ship directly to customers Businesses with no warehouse space, internet businesses
Rolling inventory Goods never enter the warehouse Fast-moving products, evergreen products
Backordering Taking orders before the gppds are produced or purchased High demand or high-value products

A comparison chart of different stock control methods

Methods to Sell or Store Stock Compared

Consignment inventory: Payment happens after another business sells your products. Big-ticket item retailers use this when cash flow is low.

Branding: Use this when combining goods for a discount to impress customers or use up absolute stock.

Drop shipping: Businesses with no warehouse space, such as online companies, have products ship directly from manufacturers to customers.

Rolling inventory: This is used for fast-moving inventory where goods never enter a warehouse.

Backordering: Companies with high-demand or high-value products will take orders before goods are produced or purchased.

Forecasting for Inventory Control

Instead of using a manual method to reorder, look at ways to mathematically forecast what is in stock or when to order. These methods can include categorizing your stock, such as in the ABC method, but mainly show what you currently have in store:

  • ABC Analysis: This method of supply chain forecasting divides all on-hand inventory into three distinct groups. “A” items are those of high value and low sales frequency. The budgetary impact of these items is significant, but their sales are not predictable. “B” items are those of moderate value and moderate sales frequency. “C” items are those of low value and high sales frequency. These items require less oversight due to their lessened monetary impact and constant turnover. Using these delineations for inventory helps you prioritize by separating out products that need more attention than others. Forecasting done with ABC analyses calculates the number of stock available based on this delineation. Additionally, storage and packing locations can be set up to reflect these delineations.

  • Reorder Point (ROP) Formula: The ROP formula mathematically tells you the right time to order or produce more stock. Using existing information, calculate the sum of your lead time demand and safety stock. You may need to know the reorder lead time alongside this formula, which is the time between placing an order and when you receive it. You must account for the lead time when calculating order timing. The formula for reorder point is:

What ROP Means

Which of the following controls can minimize the threat of mistake in counting incoming inventory?

Illustration of key ROP drivers.

Let’s say that Ava has to calculate the ROP for the liquid bandages her company manufactures in its facility. She calculates the safety stock (SS) for this product at 50 units.

SS = (Maximum Daily Usage x Maximum Lead Time) - (Average Daily Usage x Average Lead Time Days)

SS = 50 units