Inventory control is always considered a front-of-mind of a distributor or a wholesaler.
When you start to wholesale, you need to dig deeper into inventory issues and make sure your employees also have a solid foundation about it.
In this post, we want to introduce you different perspectives of inventory control. In addition, we also bring up some of its significant benefits to a business.
Let’s dive into this article and let us know your thought on inventory control.
What is inventory control?
Inventory control definition
Broadly speaking, according to Wikipedia, Inventory control or stock control can be defined as “the activity of checking a shop’s stock”.
So what does this term really mean, in the wholesale & distribution area?
Simply, inventory control is the process of effectively managing stock items, parts or supplies. Some of you may think of inventory management? Is this different from inventory control?
As many wholesale specialists, it’s very important to understand the difference between the two terms.
Inventory control vs Inventory management
Many of you may mistake the definition of the two above terms as one or don’t understand clearly the difference between the two. Especially, when you start to wholesale, you might be confused about how each of them works for a wholesale business.
Actually, in distribution terms, there is a clear difference between inventory control and inventory management.
Inventory control process involves warehouse management. This regulates:
- What products are being stocked in your warehouses and stock locations?
- Where are they located?
- How much stock is on-hand in a store, stockroom or warehouse?
Somehow what stock control needs to do is to check if inventory remains in the good condition or not; or how to design the warehouse to minimize the cost of fulfilling customer orders.
On the other side, inventory management not only includes stock control but also involve all activities surrounding effective sourcing, forecasting and replenishment in every stocking bin, location or warehouse.
Inventory management answers the questions of inventory control and plus, determines the below issues:
- When to order items
- How much to order
- Which is the most effective source of supply for each item in the warehouse?
The above explanation might help you understand more about the 2 terms. So far you could see that the primary objectives of inventory control over inventory management. The meaning of inventory management is broader than inventory control so we would say that to gain better inventory management, distributors need to take inventory control as one of the key inventory strategies.
Overall, both inventory phrases are critical to wholesale business but in this article, we want to focus only on inventory control, which is one of the keys to overall inventory management success.
How about the other term? Why is inventory management important to wholesaling?
With regard to the importance of inventory management, we will compose other articles to help you understand more about its role in wholesale business. So stay tuned!
Why is inventory control important?
As a business owner, you know inventory control is very important and facilitate other activities. Not having enough stock means you might lose sales while having too much stock could drain money out of your business.
Below we clarify some of the significant benefits of inventory control so that you could know whether you put enough resources to control inventory or not.
Better customer services
If you are a manufacturer, your business should maintain a proper amount of raw materials then you could complete the production in time. So when the finished goods are available, you can deliver them to customers and other distributions in time.
If you are a wholesale distributor, you also need to stock a proper amount of ready-made items so that you can satisfy the additional demand of your customers.
In both cases, inventory control plays an important role in meeting customers’ needs. Indeed, an effective inventory system tracks how many items you have in warehouses and forecasts how long you will take to run out of your supplies based on sales activity. When you know this information, you will make smarter decisions to give timely deliveries to customers.
Protect business from fluctuation in demand
In reality, the demand forecast for an item is not always accurate 100%. The difference between the demand forecast and actual demand may still exist. Fortunately, this fluctuation in demand could be adjusted by planning the level of inventory you need to keep in stock.
If the demand is less than what you predicted, it’s necessary to adjust quickly to reduce your production process or slow down your purchase from suppliers. On the flip side, if you have a higher demand than what you expected, you should satisfy the current demand by stock available in hand and make necessary adjustments to increase your supply.
Thus, it is critical to have an efficient inventory control system in your business to make all the modifications more smoothly.
Keep production operations smoothly
Manufacturers consider inventory control a key to maintain the continuity of production process. Keeping a smooth movement of raw materials in and out will ensure there are no shortages needed for the production operation.
Reduce the risk of loss
One of the responsibilities of inventory control is to regularly check all the items in warehouses or stock locations. This is to ensure that you don’t lose money because of obsolete, or deteriorated items.
What’s more, when checking the quantity and also the quality of stock, you may identify the slow-moving items to make smarter decisions on them. It’s time to make discount or promotions to let them sell in the market easily and quickly.
Reduce administrative workload
Having an efficient inventory management system and workflow will minimize the workload of purchasing, inspection, warehousing, etc. That also means you can save more working time and cut down overheads on labor.
Optimize working capital
Inventory control helps you make effective use of working capital. In which way?
Imagine you pay $10 for an item from a supplier, and you want to sell it at a higher price to earn some profit. If this item is still on the shelf, its value is locked up in inventory. That’s $10 you can’t use elsewhere in your business.
This case inventory control does not only take charge of managing the flow in and out of your business, it actually more about managing working capital, avoiding having too much cash blocked in inventory.
Facilitate cost accounting activities
Inventory control involves the facilitation of cost accounting activities. Inventory control provides a means of allocating the material cost of products, operation costs or labor costs in warehousing and other departments in a business.
Avoid duplication in stock ordering
When your business maintains a separate purchasing department, it will do all the purchasing activities for the company. This department will base on inventory control to purchase more stock and ensure there will no duplication in the ordering of stock.
Types of inventory control methods
Safety stock is a basic method of inventory control. When a business is not certain about customers’ demand, supplier performance or product availability, it can use this method.
Safety stock introduces an amount over and above the average use of demand of an item.
For instance, the average number of sold shoes in a footwear shop is 1000 pairs per month. As the shop uses a special process to purchase shoes from, its suppliers, it always holds an additional 200 pairs of shoes on hand to cover the uncertainty of supply. This way is called safety stock.
Utilizing the safety stock method to control inventory will help businesses increase cash outlay, and also increase the carrying cost linked to the owning stock.
Aggregate Inventory Control
Aggregate Inventory Control is a basic inventory method to classify items into 3 separate groups: materials, work-in-process, and finished goods.
With each group, a business will set a control parameter based on the cost linked to the inventory.
For example, a furniture manufacturer might have 3 different classes:
- Ingredients such as wood, lumbers, screws, paint, varnish, etc. all make up the Material class
- Assembled tables without paint or varnish; sofa frame, etc make up the Work-in-process class.
- Completed tables and other furniture ready to sell make up the Finished goods products.
The way a business control each class of inventory according to the rules established for the class is called Aggregate Control. For example, when the number of an item in the Material class, say lumber, reaches a minimum level, the company will order more lumbers to reach its maximum inventory level.
ABC control (as known as Selective inventory control) is a method of classifying and controlling stock based on its level of importance. Actually, the value of each item is used as a criterion to evaluate its importance. Other factors could be also considered, such as sales volume.
The ABC control method categorizes products in 3 groups according to pre-determined criteria.
- A items are controlled tightest and have accurate records
- B items are less tightly controlled and have good records
- C items have the simplest controls possible and minimal records.
ABC Control is quite similar to the 80/20 rule, or Pareto principle that the A items make up for the largest percentage of the overall value but a small percentage of the number of items.
An example below will help you understand more about this method:
If your business use dollar usage as the criterion to group items into 3 categories: A, B, C.
As the group A inventory has the greatest dollar usage, you might want to focus on reducing the on-hand inventory of this group of items, you will decide to keep only 1-week of group A inventory.
Other groups of inventory will be kept longer, for example, 3 weeks for group B inventory and 2 months for group C inventory. This kind of arrangement will increase inventory returns and thus, decrease the carrying cost linked to holding the inventory.
Whichever method you adopt for your inventory control procedures will depend on the business model you are conducting and the goals you want to reach.
Inventory control is very critical to the growth of your business. So it’s necessary to dive deeper into this topic and endlessly find efficient methods to have a good handle on your warehouses and stock movement.