When effective, inventory control is quiet — you only notice it making noise when it doesn’t work.
Maybe you consistently run out of best-selling products, leaving customers disappointed and driving them to the competition. Or, you’re stuck with a warehouse overflowing with unsold items that tie up your capital and increase storage costs.
If you don’t have a system in place to prevent these situations, you may have already experienced painful inefficiencies as a result. Putting the right processes in place is all you need to get back on track.
What’s inventory control?
Inventory control, also known as stock control, is the process of managing a company’s inventory levels. This typically involves reducing the number of slow-moving items and increasing the supply of fast-moving ones, creating a balanced flow of stock.
But better warehouse management is about more than moving and storing inventory. Optimizing the flow of goods helps you save money on labor and space, using only the resources you need. It also reduces the risk of overstocking and spoilage because you avoid holding inventory for longer than necessary.
Inventory control vs. inventory management
In stock management, inventory control and inventory management work together to keep operations running smoothly.
Inventory management looks at the bigger picture of what you’re storing, from product sourcing to processing returns. It involves resource planning, demand forecasting, ordering, and optimizing inventory turnover to keep inventory costs low.
Inventory control, on the other hand, focuses on keeping track of the stock you already have — making sure the right amount is available without overstocking or accumulating dead stock. It’s about analysis, synchronization, and ensuring that what’s recorded in your system matches what’s actually on your shelves. Optimizing warehouse layouts or picking and packing processes are both examples of improving inventory control.
Inventory management sets the strategy for purchasing and storing goods, but inventory control ensures smooth execution by monitoring and regulating stock levels in real time. And, while inventory control is about managing what you already have, inventory management is about making smart decisions on what to stock in the first place.
The importance of inventory control
Inventory control is about keeping your business running smoothly, reducing waste, and making sure customers get what they need when they need it. Here’s why it matters:
1. Prevents overstocking and dead stock
Holding too much inventory ties up cash and takes up valuable storage space. Worse, some products may become dead stock — items that are obsolete, expired, or no longer in demand. With proper inventory control, you can track stock levels in real time and prevent excess inventory from piling up.
2. Reduces inventory costs
Storing inventory isn’t free. Warehousing, insurance, and handling costs all add up. By optimizing your stock levels, inventory control helps you cut storage costs and minimize waste. Plus, it reduces the risk of financial losses from unsold or damaged goods.
3. Improves inventory turnover
A business with high inventory turnover sells products quickly and efficiently, keeping cash flowing. But slow-moving stock ties up resources and increases holding costs. By monitoring stock levels and adjusting supply based on demand, you can keep your inventory turnover healthy to avoid accumulating excess product.
4. Enhances demand forecasting
When you have a clear picture of inventory trends, you can forecast demand more accurately. You’ll know when to restock and when to scale back, preventing both over-purchasing and stockouts.
5. Streamlines stock management and tracking
Inventory control makes it easier to track stock across multiple locations, whether you run a single warehouse containing many areas/sublocations or a network of retail stores. With real-time tracking of inventory levels, you can pinpoint where each product is, how much is available, and when you need to reorder. This reduces errors and ensures smoother operations.
Types of inventory control systems
Inventory control systems fit into two main types: periodic and perpetual. Most businesses use a combination of both to count items as accurately as possible.
Periodic inventory system
A periodic inventory system involves updating inventory levels at specific intervals — generally weekly, monthly, or quarterly. For every period, you conduct a physical inventory count to determine the quantity and quality of goods on hand. This method is simple and cost-effective, and it’s ideal for small businesses with less complex inventory needs.
Perpetual inventory system
A perpetual inventory system updates inventory records in real time with every transaction, whether it’s a sale, purchase, or return. This system uses technologies like barcode scanners and inventory management software to maintain accurate and up-to-date inventory levels at all times.
While the perpetual inventory method saves the effort of counting items one-by-one every week or month, it’s still recommended to conduct periodic inventory counts a few times a year to ensure accuracy. Inventory shrinkage can occur for a number of reasons, so it’s important to check that your records reflect the true number of items on the shelf.
Frequent inventory control challenges
Even with the best strategies in place, businesses still face challenges when managing inventory. These issues can lead to inefficiencies, higher costs, or missed sales opportunities. Here are some common inventory control challenges and how they could impact business operations.
Human error
Relying on manual data entry and tracking increases the likelihood of mistakes. From miscounting stock during inventory checks to entering incorrect product codes, even small errors can lead to stockouts or excess inventory.
An error in an order quantity could result in 10 times the needed stock, tying up cash in dead stock and driving up storage costs. Forgetting to update stock levels can also lead to inaccurate reporting, making it difficult to track inventory.
These errors add up. Some estimates suggest they can cost businesses as much as 30% of their annual profits if not properly managed.
Time-consuming processes
Traditional inventory control methods, such as physically counting stock or manually updating spreadsheets, take up valuable time and resources. Businesses that depend on paper-based tracking or outdated software often struggle with delays, leading to slower order fulfillment and inefficient warehouse operations.
In fast-moving industries, a delay of even a few hours in stock updates can result in millions of dollars in lost sales and frustrated customers. The longer it takes to manage inventory, the more it impacts productivity and profitability.
Poor demand forecasting
Inaccurate demand forecasting can lead to two major problems — overstocking and understocking. Overstocking ties up capital in excess inventory and drives up storage costs, while understocking results in lost sales and frustrated customers. Factors like seasonal trends, sudden shifts in consumer preferences, and supply chain disruptions make forecasting even more challenging.
Globally, inventory distortions — including stockouts, shrinkage, and overstocking — cost businesses a staggering $1.6 trillion each year. Without a solid grasp of demand patterns, businesses risk sitting on dead stock or struggling to fulfill a sudden surge in orders.
Supplier reliability issues
Inventory control isn’t just about what happens inside the warehouse — it also depends on external factors like supplier performance. Delays in shipments, inconsistent quality, or last-minute order cancellations can disrupt stock levels and make it harder to meet customer demands.
If a supplier fails to deliver on time, a business might have to scramble for alternatives, often at a higher cost. This uncertainty makes it difficult to maintain optimal inventory levels and can result in cash flow problems or lost business opportunities.
8 inventory control techniques and solutions
Inventory control methods range from primitive to high-tech, with options suitable for businesses of every size and complexity. Here are a few ways to count and maintain your stock.
1. ABC analysis
ABC analysis divides items into three categories: A (high value), B (moderate value), and C (low value). Instead of counting every product at once, you cover A items more frequently, followed by B and C. This method focuses your energy on the critical few items that contribute most to the company’s revenue and profitability.
2. Just-in-time inventory
Just-in-time (JIT) inventory limits waste by reordering and receiving goods only as they’re needed in the production process, reducing overstock and storage costs. It’s especially useful for manufacturing businesses with high holding costs and predictable production processes.
3. Economic order quantity
Holding too little stock leads to frequent reorders and higher ordering costs. But ordering too much results in excess inventory and the potential for spoilage or obsolescence. Applying the economic order quantity (EOQ) formula helps you find the sweet spot:
EOQ = √((2 * D * S) / H)
For this formula, D is the total units needed in a year, S is the cost per order, and H is the holding cost per unit per year.
Say a bookstore sells 5,000 books per year. The cost to place an order is $50, and the holding cost per book per year is $2.
The bookstore could use the EOQ formula to find its optimal order quantity is 500 books:
EOQ = √((2 * 5,000 * 50) / 2) = √250,000 = 500
4. Safety stock
Safety stock is the extra inventory some businesses keep on hand as a buffer. It ensures there’s enough stock to meet unexpected increases in demand or deal with supply chain delays.
5. Batch tracking
Businesses in industries like pharmaceuticals or food and beverage sometimes need to trace goods for recalls or compliance. Batch tracking is a helpful technique that monitors a specific set of inventory throughout its lifecycle, allowing for clearer traceability.
6. First in, first out and last in, first out
The first in, first out (FIFO) and last in, first out (LIFO) methods manage the physical flow of goods by prioritizing your selling order. FIFO uses or sells the oldest inventory items first, which is ideal for perishable goods. But LIFO uses or sells the newest items first, which can be beneficial for businesses facing rising costs. It’s up to you to decide which suits your product and business needs.
7. Custom tracking
Custom inventory tracking methods use attributes like serial numbers, lot numbers, and expiration dates to keep tabs on individual items and batches. Like batch tracking, this allows for a clearer view into a product’s lifecycle and whereabouts.
8. Vendor-managed inventory
With vendor-managed inventory (VMI), the supplier manages the inventory levels for you, reducing the burden of inventory management. Usually, you send the supplier your sales numbers and let them decide how much to send. This collaborative approach helps streamline the supply chain and ensures optimal inventory levels.
7 best practices for efficient inventory control
It’s up to you to choose which inventory control techniques work for your business and product. But no matter what strategies you use, here are seven tips for effective inventory management.
1. Conduct regular audits
Regular inventory counts ensure that records match the physical inventory, reducing discrepancies and improving accuracy. Doing periodic cycle counts instead of counting the full inventory saves time without sacrificing accuracy or disrupting operations.
2. Optimize reorder points
One way to prevent stockouts and overstocking is setting automatic reorder points. Determine a minimum stock level to trigger reordering, no matter which inventory management method you use. That way, if you’re low on stock, there’s already a shipment coming your way.
Keep in mind that seasonality and other factors may require this number to be updated from time to time. Advanced inventory management software helps you optimize reorder points to meet your specific inventory needs at any time of year.
3. Streamline receiving processes
The faster you receive incoming orders, the faster you can prepare for later fulfillment. Create a dedicated receiving area, train staff on proper procedures, and use technology like barcode scanners to expedite the putaway process.
4. Establish standard operating procedures
Maintain consistency throughout your warehouses and distribution centers by creating standard operating procedures (SOPs) for all aspects of inventory control, including storage, packing, and shipping. That way, team members have a single source of truth to refer to, leading to faster and more consistent work.
5. Centralize inventory control
Inventory management systems and software allow for better coordination and management because they keep all information in one place. Even across multiple locations, you and your team know where items are and what state they’re in, leading to better informed decisions about reordering and fulfillment.
6. Forecast demand accurately
Forecasting is another feature that advanced inventory management software offers. Historical sales data, market trends, and predictive analytics are huge assets. They help you forecast demand and adjust inventory levels accordingly to reduce the risk of overstocking or stockouts.
7. Optimize storage space
Organized storage systems save space and make inventory easy to find and access. Categorizing inventory, implementing a logical layout, and using storage solutions like shelving and bins are great ways to optimize your storage space. It’s also a good idea to label many things (from products to bins) with barcodes to make picking and putaway more accurate and efficient.
How to choose the right inventory control solution
Which solutions offer the inventory control your business needs? Here are some tips to help you decide.
Consider the types of products you sell
What you sell can help determine the best inventory control solution for your business. If your inventory includes perishable items, like food, choose a method that prevents overstocking so nothing spoils. If your products are mainly small, fast-selling items, a VMI solution might be your best bet.
Assess your current setup
Do you have physical inventory in multiple warehouses? Do you use QuickBooks, Salesforce, or other business systems your inventory control solution needs to integrate with? Assess your setup and list the features you need, and then choose a solution that can grow alongside you.
Determine a budget
Research multiple solutions, making note of training, software, and implementation costs. Then, compare those costs to the time and money you’ll save with the new system to decide what your company can afford.
Supply chain techniques for effective inventory control
While managing your warehouse is a major step toward staying in control, so is keeping an eye on your supply chain. Here are some supply chain techniques to help businesses stay on top of inventory control before receiving goods.
Third-party logistics
If managing inventory in-house is becoming a headache, outsourcing to a third-party logistics (3PL) provider can help. These companies handle storage, order fulfillment, and shipping, using advanced systems to track stock levels in real time. This reduces the chances of stockouts or overordering and frees up time for businesses to focus on growth instead of warehouse management.
Bulk ordering
Buying in bulk can be a smart way to cut costs. Suppliers often offer discounts for large purchases, and it reduces the hassle of frequent reordering. But it’s a balancing act. Order too much, and you risk tying up cash in unsold stock and paying higher storage fees. The key is to use demand forecasting to ensure you’re ordering just enough to take advantage of discounts without piling up dead stock.
Cross-docking
With cross-docking, products move from suppliers to customers with little to no time spent sitting in storage. Instead of excess stock sitting in a warehouse, goods are immediately sorted and sent out, reducing storage costs and speeding up delivery times. This technique is especially useful for fast-moving or perishable products where every minute counts.
Inventory control key performance indicators to monitor
Keeping an eye on the right key performance indicators (KPIs) helps businesses stay on top of their inventory, reduce waste, and improve efficiency. Without proper tracking, you might end up with too much stock collecting dust or too little to meet customer demand. Monitor these essential KPIs to make smarter inventory decisions and keep operations running smoothly.
Inventory turnover ratio
How quickly are you selling and restocking inventory? The inventory turnover ratio measures how often stock is sold and replaced within a given period. A low turnover might mean you’re holding onto too much inventory, increasing storage costs and the risk of dead stock. A high turnover, on the other hand, suggests efficient stock movement and strong demand. The formula for this KPI is:
Inventory turnover = Cost of goods sold (COGS) ÷ Average inventory
Tracking this metric helps businesses identify how quickly you’re selling and replacing stock. And note that what makes a turnover ratio “good” depends on your industry, business size, and more.
Stockout rate
Nothing frustrates customers more than trying to buy a product that’s out of stock. The stockout rate measures how often this happens and helps businesses identify gaps in inventory planning. A high stockout rate means lost sales and disappointed customers, while a low rate indicates a well-balanced supply.
Inventory carrying cost
Holding inventory isn’t free — it comes with costs like storage, insurance, depreciation, and potential obsolescence. The inventory carrying cost measures what percentage of a company’s total inventory value is spent on holding stock. If this number is too high, it may be a sign that you’re overstocking or keeping items for too long.
Dead stock percentage
Not all inventory sells. Dead stock includes products that have been sitting unsold for a long time, often due to poor demand forecasting, seasonal trends, or changing customer preferences. Tracking the dead stock percentage helps businesses clear out slow-moving items before they become a total loss. The formula for calculating the dead stock percentage is:
Dead stock percentage = (Dead stock ÷ Total inventory) × 100
A high dead stock percentage means too much unsold inventory is taking up valuable storage space. Solutions like discounts, bundling, or liquidating excess stock can help free up space and recover some costs.
Take control of your inventory with Fishbowl
Any business can benefit from inventory management software for inventory control — but those hoping to scale benefit the most. A solution like Fishbowl helps automate processes, reduces human error, and provides valuable real-time insights to optimize operations. With advanced AI tools, Fishbowl enables growing businesses to forecast demand and gain in-depth insights into their sales and purchasing data. Fishbowl can also track inventory levels and integrate with business systems like QuickBooks to sync financial data, all in one platform.
If you’re ready to put inventory control into action, schedule a demo of Fishbowl today.
