As a retailer, the role inventory plays in your operations cannot be overstated.
It’s the lifeblood that flows through the veins of your business, determining your sales, profits, and even the satisfaction of your customers. But efficiently managing your inventory isn’t as straightforward as it might seem. Balancing the demand-supply equilibrium and minimizing stock discrepancies can feel like a daunting task. This is where inventory control comes into play.
But what exactly is inventory control, and how does it differ from inventory management?
Whether you’re just starting out or are a seasoned retail business owner seeking ways to refine your operations, use this article as your guide to learn why inventory control is important, inventory control methods, challenges you may face, and the different types of inventory control systems.
What is inventory control?
Inventory control, also known as stock control, is the process of keeping enough items, goods, raw materials, and merchandise stocked so you can meet customer demand and make a profit, while minimizing costs.
For example, if you have a brick-and-mortar beauty supply business, your stockroom is likely full of pallets of wigs, conditioners, hairbrushes, hair dye, and other products. Inventory control is how to track and maintain those goods, distributing them on the floor at the right time so you don’t over- or understock. It’s how to get the most profit from your inventory and planned purchases.
“Inventory control is the lifeblood of your store operations,” says Holly Amaya, co-founder of experiential retail Brik + Clik. “The ability to monitor and predict your inventory helps the stores visually in being adequately stocked, which impacts your revenues and store appeal.”
Running a business can turn into a guessing game without an inventory control system in place to ensure you’re always meeting customer demand. How do you make sure you have the exact amount of product on hand when and if customer demand increases?
While some businesses resort to a guess-and-pray approach, there are reliable ways you can exact your inventory control process so that you don’t run into stocking issues. Whether customers demand more or less product at any given time, you want to be ready for both scenarios.
Inventory control vs. inventory management
Though they might sound like the same thing, inventory control and inventory management do have their differences. Here’s a quick breakdown:
Inventory control is all about regulating and handling the inventory you already have on hand. For example, what you do with leftover product that doesn’t sell, or whether you track products with barcodes or RFID tags.
To improve both starts with getting a handle on your inventory control process.
📌 GET STARTED: Shopify POS comes with tools to help you control and manage your inventory. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
Importance of inventory control
Now that you understand what inventory control is, let’s look at a few top benefits of implementing it in your retail store.
The goal of inventory control is to increase efficiency and profitability by meeting customer needs. Incorrect stock counts can lead to stockouts and unfulfilled orders, which will disappoint customers. Talk about an easy way to lose them.
The ordering experience needs to be as fast and easy as possible. A third of US consumers consider switching companies after just one poor experience.
Inventory control helps you:
- Keep counts accurate
- Make the right inventory management decisions
- Eliminate write-offs
- Ensure you can fulfill orders
To keep customers satisfied and loyal, you’ll want a solid inventory control process in place. This is also a good way to avoid customer complaints that can slow you down and hurt your business.
Damaged inventory and consistently faulty suppliers are the bane of a retailer’s existence. Quality assurance and control helps you keep track of suppliers, track inventory, and comply with legal obligations.
With inventory control, you can react quickly if there are any product recalls, because you know how many units you have and where they are stored. Done well, quality assurance can contribute to your company’s positive reputation by keeping items stocked and usable.
Optimized inventory levels
Inventory control also keeps inventory levels stable, which is key to generating maximum profits. “Too little inventory and a business can’t keep up with sales. Too much inventory and overhead expenses increase,” says Reid Jackson, vice president of innovations and partnerships at GS1 US.
“Having an accurate handle on inventory enables a business to become more resilient and know what they can sell, when they can sell it, and for how much, helping avoid/mitigate out-of-stock scenarios.”
Reid also feels that when sellers don’t have a complete view of their inventory, they don’t have a clear picture of what they can sell, which has the potential to create unhappy customers and negatively impact the business.
Optimized inventory levels also help deter:
- Stockouts, or running out of inventory, a $1 trillion plague in the retail industry
- Deadstock, or inventory that is unsellable
- Spoilage, the worsening of products during the inventory processes of the sales cycle
If you’ve had the experience of visiting your favorite online retailer and seeing that three items in your cart are actually out of stock, then it’s easy to see how offputting stockouts can be for your customers as they look elsewhere to shop for items you didn’t have on hand.
Inventory control methods
Manual data entry (pen and paper)
The classic pen-and-paper approach might work if you’re a business doing single-digit monthly sales.
Chances are, you’re doing a lot more than that. Using a pen and paper can cost you time and money, considering 62% of retailers blame human error from manual processes on inventory issues. While it’s technically a viable option, it’s not your best one.
Spreadsheets can be lifesavers if you’re well-versed in equations and tables and you know what “V-lookup” means without blinking twice. The problem is, not everyone has the skills to try to manage inventory control with an Excel spreadsheet—especially the more complex your supply chain and sales process becomes.
Still, as a smaller business, you might be able to get away with the spreadsheet approach to inventory control. But be ready for inevitable errors, longer hours, and inefficiencies.
A stock card is a viable way to keep track of purchases, sales, and product returns. Especially if you’re using the first-in, first-out (FIFO) inventory method, stock cards can be a simple way to keep track of your products. But at what cost?
An analog approach to inventory isn’t the most efficient way to manage inventory. Not only is it a lengthy process, but you also run the risk of losing stock cards or recording incorrect information that will be hard to fix down the road. Using physical stock cards robs you of the efficiency automation offers.
Managing inventory control with software that’s specifically designed to support the needs of a business that sells physical products is the way to go. With the right inventory management software you minimize:
- Time spent managing product inventory with manual processes
- Inventory control errors
- Inventory mismanagement
- Deadstock, stockouts, dissatisfied customers
The type of inventory control software you’ll use depends on the business. If you’re a growing ecommerce nail polish boutique, the tools that are best for you might look different from those essential to a mid-size retailer in the apparel industry.
Software also makes it easier to integrate additional tools that manage overlapping areas of your business. For instance, if you use a point-of-sale (POS) system, it’s possible to connect it with your inventory control tools to better manage your inventory as well as your cash flow.
📌 GET STARTED: Merchants using Shopify POS can use inventory management software apps like Stocky or Shopventory to control stock in their warehouse and stores. Get the insights you need to optimize your inventory management whether you sell online, in-store, or both.
Types of inventory control systems
The type of inventory control system that’s best for you depends on factors like business size, capacity, your supply chain, or the type of product you sell.
Periodic inventory system
If you’re a smaller business, consider the periodic inventory system as a way to keep track of your physical inventory. The periodic system makes it so that you aren’t constantly counting how many of X product you have on hand.
Instead, you take physical counts of the amount of inventory you have at the beginning and end of a given period. It takes your beginning inventory, adds new inventory that you purchased during that period, and deducts the ending inventory, which ultimately lets you know your COGS, or cost of goods sold.
For example, if I account for 15 sneakers at the beginning of January, buy five more during that period, and end up selling seven pairs by the end of January, my total COGS using the periodic inventory system would be 13.
The downside? A periodic inventory system is time-consuming, can require a lot of labor, and often has to be counted during business hours, which means a loss in sales during that time if you close. It also leads to a lot more inaccuracies and miscounts.
Perpetual inventory system
The perpetual inventory system is considered by many to be the best method of inventory control. It continuously keeps track of all your inventory on a unit-by-unit basis in real time and makes sure to track once an item is sold, returned, moved from locations, or thrown out.
The upside? You get updated information on the state of your inventory levels anytime you need to know. It’s also a better way to keep a more accurate inventory count.
For example, if you sell a pack of socks and three shoe-cleaning kits, a perpetual inventory system will immediately subtract these from your current stock levels as they’re sold.
To take advantage of all the positives that come with a perpetual inventory system, businesses need to implement robust software to get the job done, since it’s virtually impossible to do this manually.
You’ve likely noticed RFID, or radio frequency identification tags, on items you’ve bought. With the help of radio frequency, RFID tags make it easy to search for and identify your inventory. They can either work passively or actively and work in tandem with software, tag readers, and antennae.
While active RFID tags can inform you of their status within a certain radius, passive RFID tags have to be scanned to collect key information like product type or location. Both functions are great for businesses that need to know the state of their inventory levels at any given moment. RFID tags are particularly helpful for preventing phantom inventory.
However, RFID tags are a pricey way of tracking inventory, despite rapidly gaining popularity, with revenue forecasted to surpass the $40 billion mark by 2025. Giants like Amazon and General Steel use RFID tags to maximize their profitability as part of their supply chain management strategy.
- Keep more precise records of your inventory at any time
- Speed up the process of inventory control
- Make moving inventory easier to track
- Significantly reduce costly inventory errors
You might have seen barcodes in big-box stores like Walmart or Target. But it’s also a viable way for smaller businesses to control inventory that isn’t as expensive as RFID tracking.
While both barcodes and RFID tags can carry product information, they do have their fundamental differences. So you want to take the time to vet both options and weigh what features can help you maximize inventory control.
Inventory control challenges to overcome
Here are some of the most common inventory control challenges you may face:
1. Overstocking and understocking
One of the key challenges in inventory control is striking the right balance between overstocking and understocking. Overstocking means tying up capital in unsold goods, potentially leading to storage issues and, in some cases, spoilage for perishable goods. Understocking, on the other hand, can result in missed sales opportunities and unsatisfied customers. Getting the balance right requires accurate demand forecasting, which is often a challenge due to market uncertainties and fluctuations.
2. Inaccurate data
Dealing with inaccurate data can stem from various sources, including human error, faulty systems, or outdated technology. Inaccurate data can result in reporting incorrect stock levels, which can lead to overstocking or understocking issues. It can also cause problems in planning, budgeting, and decision-making processes. That’s why it’s crucial to have reliable, accurate, and up-to-date inventory data for efficient inventory control.
📌GET STARTED: Shopify POS comes with tools to help you control and manage your inventory across multiple store locations, your online store, and warehouse. Forecast demand, set low-stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
3. Vendor management
Managing relationships with suppliers can also present a significant challenge. Depending on the size of your retail business, you may deal with multiple vendors, each with their own unique requirements, lead times, and reliability issues. Late deliveries, inaccurate orders, or subpar quality can cause significant disruptions in your inventory flow, affecting your ability to meet customer demands.
4. Technology integration
As the retail industry continues to evolve, so does the technology that supports it. New inventory control systems, ecommerce platforms, point-of-sale (POS) systems, and supply chain management tools are being developed and updated constantly. But integrating these technologies and making sure they work harmoniously can be a daunting task. The lack of proper integration may lead to inefficiencies, data silos, and ultimately, poor inventory control.
📌 GET STARTED: Are you thinking about moving to Shopify POS? Use our migration tools to securely migrate products, inventory, and customer information from your old POS system to Shopify.
5. Seasonal demand fluctuations
Coping with seasonal demand fluctuations is a common challenge in inventory control. During peak seasons like holidays, demand can spike dramatically, causing potential stock shortages if not anticipated and properly planned for.
On the other hand, periods of low demand can result in overstocking and associated costs. Understanding and predicting these fluctuations to adjust inventory levels accordingly is key to successful inventory control.
📌GET STARTED: Shopify POS comes with tools to help you control and manage your inventory across multiple store locations, your online store, and your warehouse. Forecast demand, set low-stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more.
Inventory control best practices
Regardless of the inventory control system you use, there are fundamental best practices you can apply to your process. Here are three worth considering:
Audit inventory often
The more often you audit inventory, the less prone to human error and theft your inventory will be. To do this, it’s necessary to schedule inventory checkpoints where you can take the time to process what you have on hand. Stocktakes and cycle counts can work together to manage the inventory on hand.
Categorizing and organizing your inventory now will make inventory control easy later. How? Start by using the ABC method, which categorizes your inventory based on how profitable and important it is.
Category A: Your most important stock items. These sell often and quickly. Category A items should be generously stocked, as they account for 80% of your revenue.
Category B: Less essential yet still important items go in Category B. These items are second in line of importance and account for 15% of your revenue.
Category C: The least important items go in Category C. While you don’t want to run out of these items if you can help it, they aren’t essential to your bottom line and account for just 5% of revenue.
💡 PRO TIP: Skip the spreadsheets and use Shopify’s ABC inventory analysis report to see which products contribute the most revenue.
Keep in mind you can also categorize your inventory by type or by location as a way to keep track of current stock levels.
Set reorder points
Setting reorder points, or ROPs, lets you know when you need to replenish your inventory levels as they get low. It’s what tells you to place an order before you run out of stock.
Set a time where you periodically check on your inventory to calculate reordering amounts. Assuming you have safety stock, here’s a formula you can use to figure out your reorder points:
ROP = (lead time x daily average usage) + safety stock
Here’s what each section means:
Lead time: The time it takes for your supplier to fulfill your orders
Daily average usage: Number of sales you make of that specific product
Safety stock: Any extra stock you keep on hand to avoid stockouts
Figuring out reorder points becomes easier with software. But if you must do it manually, this formula can give you a more accurate picture of what you should be reordering to prevent stockouts.
💡 PRO TIP: Set reorder points in Shopify admin and get notified when you’re running low on stock. This ensures you have enough lead time to replenish a product’s inventory before quantities reach zero.
Controlling your store’s inventory
Inventory control is not to be confused with inventory management. While they’re closely related, each takes care of different but equally important tasks as part of your overall inventory process.
If you’re focusing on inventory control, you’re investing time in warehouse management and ensuring you’re managing the inventory to maximize profit and minimize the cost associated with order fulfillment, replenishment, and inventory turnover.
If you go through the process of implementing an inventory control system that works with your inventory workflow, you’ll be well on your way to maximizing revenue.
Additional research and content from Alexis Damen.
Inventory control FAQ
What are the 3 inventory control systems?
- Fixed Order Quantity System: This system sets a fixed order quantity for all items in the inventory, and reorders them when the stock reaches a predetermined level.
- Perpetual Inventory System: This system continuously updates the inventory records when items are sold or a new shipment arrives.
- ABC Analysis: This system classifies inventory items into three categories – A, B, and C – based on their importance to the organization. A-items are the most important, while C-items are the least important.