Companies allocate and manage their stock through inventory control to maintain optimal levels for business operations. Inventory control is important. A bad system can lead to big revenue loss. Don't overlook the importance of managing inventory.
In fact, Harvard Business Review states, “Overall, our study suggests, retailers can lose nearly half of intended purchases when customers encounter stock-outs. Those abandoned purchases translate into sales losses of about 4% for a typical retailer. For a billion-dollar retailer, that could mean $40 million a year in lost sales.”
With so much at stake, inventory control has become a burning topic that many companies are seeking to optimize in order to maximize their profits.
The efficient inventory control of a business results in a reduced risk of overstocking and stockouts, reduced holding costs, increased operational efficiency, and greater customer satisfaction that leads to returning customers.
This article will act as a comprehensive guide of everything to know about inventory control, how outsourcing fulfillment to a 3PL improves inventory management, and the essential metrics to get started and maximize business performance.
Understanding Inventory Control:
Oxford Languages defines inventory control as the process of ensuring that appropriate amounts of stock are maintained by a business, so as to be able to meet customer demand without delay while keeping the costs associated with holding stock to a minimum.
Although commonly used interchangeably, inventory control and inventory management are not the same. Inventory control deals with the present tracking and managing of inventory, while inventory management deals with broader strategic planning and organization of inventory. Inventory control and inventory management act as two sides of the same coin that work together to optimize inventory allocation in both the short and long-term.
Inventory control is made up of three components that work in unison to maximize the operational efficiency of a business:
1. Accurate tracking: The precise tracking and recording of inventory quantities and locations. Accurate inventory tracking results in reduced inventory errors, prevents stockouts and overstocking issues, and can provide insightful information to assist with inventory management.
2. Efficient ordering processes: The process of purchasing inventory that results in minimized costs and meets customer demands without delay or excess. An efficient ordering process prevents over or underordering, enhances supplier relations, and reduces lead times.
3. Optimal stock levels: Maintaining the perfect amount of inventory to meet demand without incurring unnecessary holding costs. Maintaining optimal inventory levels results in increased customer satisfaction and reduced risk of overstocking and emergency purchases.
Essential Inventory Control Metrics:
Inventory Turnover Ratio:
The inventory turnover ratio measures how many times inventory is sold and replaced in a given period. A high inventory turnover ratio means that a company is selling and restocking a product quickly. A low inventory turnover ratio means that products spend more time on the shelves before being sold.
This ratio is essential to assess the demand for a product and to reduce the risk of overstocking. To improve inventory turnover companies can implement regular inventory audits and take advantage of demand forecasting software.
Outsourcing to a 3PL:
One solution to improved inventory management is outsourcing order fulfillment to a 3PL/Order fulfillment provider. Reputable, advanced 3PLs have invested in technology, which is a win for companies looking to improve their supply chain. 3PLs like a2b Fulfillment have advanced warehouse management systems (WMS) that include comprehensive inventory management reporting, allowing clients visibility into inventory levels - both current and historic. By utilizing a 3PL, companies can better manage their inventory and, with the available analytics, ultimately improve their demand forecasts.
Stockout Rate:
The stockout rate is the percentage of goods available when ordered by customers. A low stockout rate signals good inventory control and the consistent availability of a product when it is demanded by a customer. A high stock-out rate means a low availability of a product and often results in the loss of sales and revenue for a business.
To reduce stockout rate companies can implement real-time inventory tracking software and/or keep safety stock (extra inventory held by a company in case of demand greater than projected).
Days Sales of Inventory (DSI):
Days sales of inventory (DSI) is a ratio that represents the average number of days it takes a business to sell its inventory, typically calculated within a year. A low DSI indicates the efficient turnover of inventory and is safer for a business because it means that the company’s money is tied up in its inventory for less time.
A low DSI also results in lower storage costs of inventory as it is spending less time in the warehouse. A high DSI indicates an inventory management inefficiency and/or that the good is having trouble selling. A high DSI can be dangerous for a company because it results in decreased liquidity of funds and increased holding costs.
Gross Margin Return on Investment (GMROI):
Gross Margin Return on Investment(GMROI) measures the profitability of a company’s inventory through calculating the gross profit earned for each dollar of average inventory. A high GMROI means a high profit per inventory dollar and a low GMROI means a low profit per inventory dollar. A high GMROI is achieved through efficient inventory purchasing and low holding costs through efficient inventory management.
Tracking GMROI is essential for a business because it can highlight the inefficiencies within inventory investment as well as identify profitable products.
Advanced Inventory Control Metrics:
Backorder Rate:
Similar to the Stockout Rate, the backorder rate is the percentage of orders that cannot be immediately fulfilled due to lack of stock. With the Backorder Rate, customers can still place orders, however, back-ordered items will have much longer fulfillment and delivery times. If a company has a high Backorder Rate, they risk losing customers, low customer satisfaction, and a poor brand reputation.
Carrying Cost of Inventory:
The carrying cost of inventory refers to the cost per unit of inventory. A high carrying cost of inventory means that there is an overstocking issue in the company that is resulting in increased holding costs and therefore increased total carrying costs. A low carrying cost of inventory signifies the efficient control of inventory and saves the company money in the short and long term. To minimize carrying costs companies can implement lean inventory practices and/or just-in-time (JIT) inventory.
- Lean inventory practices refer to the minimization of wasted inventory and the optimization of inventory levels to meet customer demand without excess.
- Just-in-Time (JIT) Inventory Management refers to a strategy to reduce holding costs by receiving inventory from suppliers only when the inventory is needed.
Order Cycle Time:
The order cycle time refers to the average amount of time it takes a company to process, ship, and deliver a good. A high order cycle time may result in upset customers as it would take longer to receive their product after purchasing. However, the opposite is also true, a company can take advantage of a low order cycle time to increase customer satisfaction and loyalty, resulting in returning business. Companies can improve their order cycle time by streamlining order processing and having efficient supplier management.
Fill Rate:
Fill rate represents the percentage of customer demand fulfilled through the inventory on hand. A high fill rate means that a company can meet the demand for their goods with little to no delays. A low fill rate means many orders cannot be fulfilled with the immediately available inventory. To enhance the fill rate a company can, develop more accurate demand planning to reduce inventory shortages and always keep the optimal level of inventory.
Best Practices for Effective Inventory Control:
Implementing Inventory Management Software:
Implementing inventory management software can increase the efficiency and accuracy of managing inventory. Through the ability to track inventory in real-time and advanced automation inventory management software provides a unique advantage that works to eliminate human error.
- Real-time Inventory Tracking: Allows companies to see inventory levels, order statues, and order trends in real-time. This allows companies to not only keep up with the fluctuations in customer demand, but also make strategic decisions for the future.
- Automation: Automates routine tasks like stock monitoring, reordering, and data entry, reducing human error and saving time and money.
Key features to look for in an inventory management system:
- Seamless System Integration: When choosing inventory management software, it is essential that the software is easily integrated with popular platforms, allowing for a simple installation process.
- User-friendly interface: It is important to choose an interface that facilitates ease of use and in turn results in quick adoption by staff.
Regular Inventory Audits:
Regular inventory audits are an essential part of ensuring consistent and reliable inventory control. Regular audits ensure that the physical inventory matches that on the books. Consistent audits result in far greater inventory accuracy and reduced inventory discrepancies.
Types of inventory audits:
- Cycle Counts: The periodic counting of a small subsection of inventory items, typically conducted daily or weekly.
- Full inventory counts: The comprehensive audit of all inventories in a company’s possession, typically done quarterly or annually.
Best practices for conducting audits:
To maximize audit effectiveness and efficiency, follow these best practices:
- Use barcode or RFID technology for faster and more accurate counts.
- Schedule audits during off-peak times to minimize disruption to operations.
Demand Forecasting:
Demand forecasting plays a crucial role in optimizing inventory levels to meet consumer demand. Efficient demand forecasting allows businesses to estimate the future demand for a good based on the sales history and past market trends.
Methods for accurate demand forecasting:
- Historic sales data: The ability to analyze past sales patterns of a good allows for better future predictions of sales fluctuations.
- Market trends: Monitor industry trends, economic indicators, and competitor activities to anticipate changes in demand.
Tools and technologies for demand forecasting:
- Advanced analytic software
- Economic indicators
- Machine learning
Supplier Relationship Management:
Maintaining a strong relationship with inventory suppliers is essential for ensuring the consistent, timely supply of inventory. A supplier relationship that fosters trust, reliability, and the ability to fit the specific needs of a company plays a pivotal role in being able to react to any inventory demand fluctuations and optimize operational efficiency.
Strategies for effective supplier management:
- Communication: Develop an open channel for honest communication about the company's needs and for discussing any problems to quickly address solutions.
- Negotiation: Negotiate favorable terms and pricing to optimize the cost of procurement and to minimize risk.
Benefits of reliable suppliers:
Reliable suppliers play a vital role in streamlining operations, reducing lead times, and enhancing flexibility in reacting to any fluctuations in consumer demand.
Conclusion:
Inventory control is an extremely important and often overlooked aspect of business. Companies that understand and implement the inventory metrics above will ensure that their company is striving for optimal inventory levels, low holding costs, reduced lead times, greater profits, and great customer satisfaction. Furthermore, when these metrics are combined with the best practices above, businesses foster the perfect environment for continued success in all aspects of inventory control.
If your business is looking to take the next step into advancing its inventory control and management as well as harness the powerful software and analytics mentioned above contact a2b Fulfillment and talk to one of our customer service professionals today.
- Contact a2b Fulfillment
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