Stop me if you’ve found yourself in either of these situations recently:
You have a product that’s flying off the shelves, but people are frustrated because you can’t keep up with consumer demand, because you don’t have enough raw materials on-hand to keep making enough product to keep shelves stocked.
You have a warehouse overflowing with product you can’t sell that’s costing you money by taking up valuable warehouse space for no good reason.
If you find yourself in any of these situations, you’ve got an inventory control issue.
Today, we’ll show you how to fix it and avoid these kinds of problems moving forward.
What is an Inventory Control System and Why is it Important?
In simple terms, inventory control is the processes and systems used by a company to track their goods through the entire supply chain. From purchasing to receiving, moving, picking, transfer, shipping, and any of the other steps in-between.
As companies get bigger and move more products, they eventually need inventory control systems to help them manage the load of keeping track of all the different moving parts in their business.
Inventory control is crucial for companies for a number of different reasons – the primary one being that it reduces costs in both raw materials and human resources. Beyond that, inventory helps keep your customers happy by preventing kinks in your supply chain that can lead to delays.
Because of this, and how complex the supply chain can get for large companies, inventory control can literally be the difference between astronomical success and catastrophic failure for many companies.
Companies with good inventory control systems are far more likely to find success than their competitors who are less invested.
What are the Four Main Types of Inventory?
Inventory is a pretty broad term, so before diving deeper into the topic, let’s take a few moments to talk about the four main types of inventory you’ll want to control.
1. Raw Materials
These are the materials you use to produce your finished goods and products. And while you may not be selling raw materials, they still count as part of your inventory and you’ll want to know how much of each item you have on-hand at any given moment to avoid breakdowns in your supply and production chain.
If you use an item to make a product, it’s commonly classed as a raw material. Bolts, nuts, metals, and about a billion other things can fall under this heading.
2. Work In Progress (WIP)
Do your products get produced in multiple stages? If so, they are generally classified as work in progress (or WIP for short). This item isn’t necessarily a raw material anymore (in fact, it might be made up of several different raw materials), but it’s also not a finished product. Hence the work in progress tag.
And even though the current item doesn’t fall under the other classifications, it’s still part of your inventory and needs to be tracked.
It’s also worth noting that work in progress may be items that are complete, but haven’t gone through final inspection or quality assurance processes before being marked as ready for sale. Until it’s done and ready for sale, it’s a work in progress.
3. Finished Goods
Just like the name implies, these are your finished products that are ready for sale to customers. After your raw materials become work in progress and are finished and inspected, they move into this category.
4. MRO Goods
MRO inventory is maintenance, repair, and operating supplies that are required to keep the machines that manufacture your products running. It’s easy to mix items in this category with raw materials. For example, bolts used to make your product are raw materials. Bolts kept on hand as spare parts to repair the machines that make your product would fall under MRO goods. Your janitorial supplies would also fall under this heading, along with office supplies, and so on.
You may think you don’t need to keep an inventory of these items, but you should. They may not be products or part of manufacturing, but they help keep your business running and not having them on hand can cost you in the long run.
What are the Main Inventory Control Types?
There are four main types of inventory control to consider when you’re first starting out. Let’s take a moment to break each of them down.
1. Periodic Inventory
The simplest type of inventory control is periodic inventory.
As the name implies, periodic inventory is a manual inventory count that happens during a set window of time.
For example, I once managed a movie theater. Every other Thursday we had a periodic inventory of concession items. On this night, after close, we’d manually count every cup, every popcorn bag, every box of candy, and so on.
This was a more detailed inventory than our nightly closeout count and the purpose was to ensure we had a 100% accurate count every two weeks.
The periodic inventory system works if you have a small business or a small amount of inventory to track. It becomes less useful as you add more and more items and components to your inventory tracking, when you have to track inventory at multiple locations, and so on.
The other downside of periodic inventory tracking is that it ties up your employees. You’re paying them (or an outside inventory company) to count. When it’s your own company’s employees, this is money spent on inventory rather than making products that generate revenue.
Most small companies start with a periodic inventory – weekly, monthly, yearly, or whatever time frame fits your needs – but eventually you will most likely outgrow this method.
2. Perpetual/Cycle Inventory
The next step up the inventory control ladder is Perpetual or Cycle Inventory Control.
In this system, we’re not counting everything in our inventory once per specified time frame. We are instead counting sections of our inventory daily on a rotating basis so we eventually wind up with a full inventory spread over days or weeks rather than a single day.
The benefit of this approach is it allows you to spot problems and trends (like shrink) earlier than you would with the periodic inventory method. You’re able to compare actual counts against inventory records – which can be invaluable because it allows you to take the time to investigate discrepancies.
Another benefit is that the daily counting spreads out the inventory process and makes it less daunting – which is especially helpful for companies with a larger number of items to inventory. Instead of taking up a whole day with inventory, the process is instead just one element of a regular workday for your team.
3. ABC Counting
ABC counting? Letters and numbers? This sounds like algebra…
Don’t panic – ABC counting is just the next inventory control system.
ABC counting is really the next step after you implement a successful cycle inventory program. It operates on the idea of the Pareto Principle, which is more commonly known as the 80/20 rule. That breaks down to you spending 80% of your time on the 20% of things that bring you the biggest return.
So, with a perpetual inventory system in place, you can start spotting which of your inventory items offer the highest returns. We can then spend time figuring out more data for these items and focus on ensuring our inventory and supply chain for these major movers gets priority.
Which would you rather spend time and energy on: the inventory items that drive the bulk of your sales or things that are less vital to your company’s overall success?
ABC counting allows you to focus on the former, which is likely to have a significant impact on your bottom line.
4. Just-In-Time Inventory
Our final inventory control system is just-in-time inventory.
This one’s a bit different from our three previous examples in that this system is heavily focused on your supply chain. So, how does it work?
With just-in-time inventory, you’ll strive to make sure that your supply chain is functioning as efficiently as possible. The goal of this is to ensure you have exactly the right amount of inventory available or on the way for replenishment as orders come in.
I like to think of it as a Zen approach to inventory control, because it’s all about balance. When just-in-time inventory management is working properly, you’re not carrying loads of extra product or material – you have the perfect amount every day for what you need and nothing extra.
This allows you to save money on carrying costs for your inventory. There’s no need to waste money on product sitting on shelves or in warehouses if you can figure out the exact inventory levels you need and remove all the excess.
This one requires a lot of insight and analysis, but the rewards for companies who can make it work are well worth the investment.
How Do Inventory Control Systems Work?
Most major companies use inventory control software to help manage their products these days. And while there are still smaller companies using older manual methods for tracking things, inventory control software is clearly the way of the future.
These systems work by using software and apps to help you track inventory at every stage of your supply chain, across multiple locations, with a simple press of a button.
They can warn you of potential issues before they happen, prevent loss and shrink, and ensure your business runs smoothly at every phase of product development.
There are essentially two key ways this system uses to track inventory:
Inventory control systems using barcodes are significantly more accurate than the old manual methods. This is because the system is updated every time an employee scans a barcode as the item moves through your supply chain.
Here are some of the benefits of the barcode system:
- Eliminates manual tracking errors – simply scan the barcode for data entry
- Faster inventory tracking
- Updates inventory counts instantly and automatically
- Easy to track inventory movements between multiple locations
- Easier, more accurate reporting and analytics
Barcoding has been a game changer in the field of inventory management. It’s easy to implement, and once installed offers a quick return on your investment in the form of time and resources saved.
Radio Frequency Identification Systems (RFID) offer up many of the same benefits, but use a different type of technology.
In this system, RFID tags are placed on items with stationary trackers (and manual trackers for employees) placed throughout the warehouse. Each time the tag is tracked, the information is recorded by the inventory control software.
There are downsides to RFID tracking compared to barcode tracking.
The primary one is the cost. RFID tracking remains more expensive than its barcode alternative. As such, RFID tends to be used only for high value items.
The other issue lies in the technology itself. RFID tracking has a fair amount of range where an item can be tracked in terms of the distance between the tag and the reader, but there have been interference issues.
The RFID system is also more expensive to implement, and will have to be implemented not only in your warehouses, but in the rest of your supply chain too.
That being said, both systems will help you have a better overall picture of your inventory. RFID is relatively new tech, so it seems safe to assume that it will become both cheaper and more reliable.
No matter how you decide to track your inventory, I hope you’ve come away from this article with a better understanding of why inventory control is important and how it can help you improve not only your bottom line, but how you service your customers.
Companies spend huge amounts of money on inventory, so it only makes sense to make sure we’re tracking it in the most effective and efficient ways possible.
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