Inventory control is an important part of a successful business, in fact, inventory metrics, according to Zip Inventory, are only accurate 63% of the time for companies. Keeping accurate inventory records and managing inventory is essential to profitability in a business that relies on the turnover of merchandise or physical goods.
In this article, we will discuss the key objectives that must be achieved to ensure proper inventory control.
We will see that having clear objectives allows for better inventory management and tracking, and how these objectives are necessary for companies to reach their full potential. But first, a brief definition:
According to Mindiolaza & Campoverde (2012) inventory control within a company is the way to accurately and correctly determine the existence of available merchandise within the warehouse to meet the needs of customers and consumers of quality products, goods and services in the best possible conditions.(p.3)
The International Financial Reporting Standards (IFRS) define it as the :
"Supply and storage in optimum conditions of goods intended for sale in the normal course of business, as well as those in process of production or to be used or consumed in the production of other goods to be sold."
Now, what are the goals or objectives that a company pursues when implementing a certain inventory control or management system, let's look at some of them.
Inventory control objectives
Cost reduction
Inventory control is a crucial part of any business operations, as it helps ensure that products are available when customers need them.
While the primary goal of inventory control is to ensure that customers have access to products when they need them, another key focus should be cost reduction.
Reducing the costs associated with inventory can help companies optimize their operations and improve their bottom line.
To reduce inventory-related costs, companies must first analyze the amount of inventory they have on hand.
If too much inventory is stocked, companies should consider ways in which they can reduce this excess inventory without affecting customer service levels.
This could include streamlining production processes or adjusting demand forecasts so that only necessary items remain in stock.
Accuracy and efficiency
Inventory control ensures that the right amount of stock is maintained at all times, which in turn allows for an appropriate SLA (Service Level Agreement) to be given to customers and efficient purchase planning.
Without effective inventory control, companies can find themselves with too much or too little stock on hand, which can lead to significant losses in profits. Therefore, it is critical that companies understand and prioritize inventory control objectives to ensure their continued success.
This involves ensuring that sufficient products are available when needed, while avoiding excessive stockpiling, which can unnecessarily tie up resources such as time and money.
To achieve this goal, companies must have a clear understanding of their optimal inventory level and develop strategies to monitor it effectively.
Security
Security is an important consideration for companies when it comes to inventory control. It is essential to ensure that all inventory is properly protected and tracked to prevent theft or other problems.
With careful planning and the right security systems, companies can keep their inventory safe and at the same time optimize their processes.
The objectives of a well thought-out inventory control system should include maintaining a secure environment for all items entering the business. This means establishing security protocols both within the warehouse and during transportation.
Security cameras, padlocks, alarms and guards are some of the measures that companies can take to monitor their stock at all times.
Automation
According to a global study by Bizagi, 60% of companies in Latin America prefer to automate and in Mexico 21% are already in the process.
What about the rest, they are still using outdated technology and managing their finances in Excel. According to Zafiro Software, more than half of the companies in emerging industries do not update their inventory system, which detracts from their capacity, efficiency and the opportunity to grow in size.
And this is because automation has changed the way companies manage their inventory in a radical way.
Technology has made it possible to track inventory in real time, automate order processing and efficiently manage stock levels.
With automated systems, business owners can focus on long-term goals instead of short-term tasks such as manual data entry or paper filing.
Automated inventory control systems provide accurate information on current stock levels and allow companies to adjust their orders accordingly, without overstocking or understocking any item.
In addition, automated systems make it easier for companies to monitor trends in sales and purchasing patterns so they can forecast demand more accurately. This helps them develop strategies for future orders that lead to cost savings due to reduced waste of time and resources.
Benefits of proper inventory management
Although the benefits have already been mentioned throughout the article, in this section we will summarize the benefits of good inventory management:
- Helps companies keep track of their inventory.
- Allows to understand customer demand.
- Helps identify any potential problems with product availability.
- Saves money by reducing waste.
- Ensures that the right products are in the right place at the right time.
- It helps companies make better decisions about purchasing more products and managing the stock they already have.
- Reduces loss due to theft or other unexpected events.
- Helps improve customer service levels and increase profits.
Technology to improve inventory control
There are numerous technology solutions that can help you keep accurate records of what goes in and out of your warehouse, as well as monitor stock levels. Not only will this improve efficiency in operations, but it can also save money by avoiding costly overstocks or shortages.
RFID tags
The most common technology used for inventory control includes barcode scanning systems and RFID tags. Barcodes allow companies to quickly record item information, such as product numbers, prices and quantities, with a simple scan.
Javier Ramirez summarizes his concept as follows: "RFID, or Radio Frequency Identification, is a method of remote data storage and retrieval using devices called RFID tags. An RFID tag is a small device the size of the head of a pin and can be placed on any product, from soup cans to sneakers, animals or people."
RFID tags provide even more detailed tracking capabilities, including real-time product location data, making them ideal for larger warehouses that require more complex inventory control processes.
SKU Identifiers
The acronym SKU stands for "Single Key Unit" and comes from the conceptualization of Warehouse Management.
It is a key part of inventory control as it allows tracking of stock keeping units, as SKUs are unique product identifiers used by companies to identify and track individual items within their inventory system.
Demián Siburu defines them as follows: "It is each of the elements of options that exist in the market for a brand, being individualizable and differentiable from the rest of the portfolio".
They enable easy recognition and traceability, which helps companies keep accurate records and avoid costly errors in their inventory management processes. With proper SKU tracking, retailers can have a clear view of what products are available and where they are located in their supply chain network.
Inventory management methods
ABC Method
One of the most popular inventory management methods in use today is known as the ABC or Cycle Counting method.
The ABC method groups items into three categories: A (higher value or faster moving items), B (moderate value or moderate moving items) and C (lower value or slower moving items).
This system allows companies to prioritize their inventory counts based on these categories so they can focus their efforts on specific products first. Cycle counts involve performing frequent physical counts of an item's inventory to identify discrepancies between the actual count and the quantity recorded in the system, allowing for quick adjustments if necessary.
Inventory control is a vital component of successful business management. For companies that handle large volumes of inventory, implementing an effective inventory and cycle counting strategy is essential to maintain accurate records and avoid costly losses.
By breaking down the total inventory into smaller segments, cycle counting allows personnel to verify the quantity and condition of items more frequently than when taking complete physical inventories.
This helps to quickly identify discrepancies between actual and recorded stock numbers, allowing companies to execute the necessary adjustments in real time rather than waiting until a full physical count is completed. Cycle counts also allow companies to proactively manage their stock levels so that they can better meet customer demand without overstocking or understocking their shelves.
FiFo Method
Another popular method of inventory control used by many companies is the First-in, First-out (FiFo) method.
The FiFo method ensures that inventory leaves the warehouse or store in the same order in which it was received. This means that goods purchased first are sold first. By doing this, companies can avoid selling obsolete products, as well as monitor their stock levels more effectively by identifying which items need to be reordered first.
The use of this system also helps to track costs, as older items will be sold at a lower price than new items, increasing profit margins and minimizing waste.
FeFo Method
The FeFo (First Expired, First Out) method is also widely used.
The FeFo method gives priority to ensuring that expired products are removed from store shelves and replaced with new products as soon as possible. This helps reduce spoilage and waste, while ensuring that customers always have access to fresh produce.
It also helps companies manage their cash flow more effectively by reducing cash tied up in expired merchandise or unsold inventory. Businesses should consider all aspects of inventory control when deciding which methods to use for their operations.
Best practices for maintaining inventory levels
Here are some tips on how to better maintain your inventory levels.
- Make a regular count of all items in stock and compare them with available records. This will provide an accurate account of what has been sold and what needs to be replenished.
- In addition, create a reorder point system based on customer demand so that when stock reaches a certain level, an order for new items is triggered.
- Monitor trends in buying patterns to know when to increase or decrease the amount of stock held in inventory.
- Use software programs specifically designed to manage inventory levels and track transactions in real time.
Conclusion
Inventory control is an essential part of any successful business. By understanding the basics of inventory control, companies can gain a competitive advantage and increase profits.
As Orlando Espinoza explains, inventory control is: "A fundamental tool in modern management, since it allows companies and organizations to know the existing quantities of products available at a given place and time, as well as the storage conditions".
With the right tools and strategies, companies can reduce out-of-stocks, minimize costs, improve customer satisfaction and maximize efficiency. Leveraging technology, such as barcode scanners and cloud-based systems, can help companies optimize their processes and increase accuracy.
References
- Arroba Salto, J. E., Angulo Rosales, Y. A., & Naula Valla, S. M. (2018). Inventory control and its impact on financial statements. Observatory of the Latin American Economy, (November).
- Demián Javier Siburu. S.f. Analysis and Improvement of a Brand's SKU Portfolio. Available at: https://ucema.edu.ar/posgrado-download/tesinas2001/Siburu-MADE.pdf
- Maldonado, N. M. R., García, F. C., & Barajas, A. G. (2020). International Financial Reporting Standards as instruments of business management and managerial control: beyond a function in accounting. Universidad & Empresa, 22(39), 1-25.
- Orlando Espinoza, (2011), La administración eficiente de los inventarios, Madrid.
- Ramirez, R. (2006). RFID applications as a tool for the marketing process. Santiago: Universidad de Chile.
