From the blog Inventory Control: 4 Major Ways It Affects Your Success (With Examples)
Inventory control, also called stock control, is one of the most important aspects of running a healthy business. It’s one piece of inventory management—all the processes that get your raw materials and finished goods to the right place, in the right amount and at the right time.
While inventory management concerns your system, inventory control deals with the operational nitty-gritty. It focuses on improving inventory accuracy, determining the right stock levels, and optimizing your supply chain.
Below, we’ll share the modern tools business leaders use to get a better grip on their stock. We’ll break down four major areas where inventory control has a big impact on success. Lastly, we’ll take a look at inventory stumbles by three different retail and restaurant giants so you can avoid making the same mistakes.
How modern small businesses approach inventory control
A proper inventory control system delivers visibility. It helps you understand what items are on hand, where they are, and when it’s time to re-order. Plus, it will show you how fast your inventory turns into sales.
That’s because the ultimate goal of inventory control is to avoid shortages and excess stock. From apparel businesses to auto shops, most industries deal with spoilage, shrinkage and dead stock.
However, there’s an urgent need for product-level clarity for businesses selling perishables.
Food and cosmetics have to move quickly to avoid health code violations. Seasonal businesses also rely on frequent inventory turnover. Every article of winter clothing still on the rack at the end of the season is one less sale in the spring.
Any business owner dealing with physical stock needs to prioritize inventory control. It all starts with having the right tools.
Creating a complete inventory control system
New technologies have made controlling inventory much easier to do across locations. These are the modern tools and methods used to get an accurate inventory count.
- Inventory replenishment strategy: Your big-picture inventory management method dictates how you’ll use the tools below. Common techniques include the ABC analysis and First in First Out method.
- Inventory management software: Cloud-based software solutions let you analyze your full inventory or dive into store-specific numbers. Access real-time data from a tablet or mobile device. Set up automatic reorders for hundreds of SKUs and UPCs from your direct suppliers.
- Point-of-sale system (POS): This allows businesses to manage payments, track sales and manage inventory with one tool. Integrate your POS with your inventory software, or use built-in inventory tracking features.
- Barcode scanner: Eliminates the need for pen-and-paper counts (and lowers the risk of human error). Instead, product details like SKU number, size or color are instantly updated within your POS system and other software solutions.
- Radio Frequency Identification (RFID): For large or diversified businesses, RFID guards against loss and simplifies warehouse management. A microchip is embedded in the product packaging. Unlike barcodes, multiple chips can be scanned at once from a distance, automatically updating inventory.
4 major areas impacted by inventory control
These examples illustrate the important relationship between inventory control and the success of the rest of your business operations.
Let’s dive in.
Imagine a sandwich shop has a ham surplus. Their inventory control software alerts them to the excess stock, so they offer a $4 Cuban sandwich deal all week.
There’s no magic formula for aligning inventory and sales, but inventory turnover ratio is a good marker. It tells you how well you’re generating purchases from inventory. Use it to find the number of times you sell and replace inventory each year. Generally, the higher the number, the better your sales were.
Here’s the inventory turnover formula:
Cost of goods sold (COGS) ÷ average inventory = inventory turnover
If you had $80,000 in COGS and an average inventory value of $15,000 last year, you turned over your inventory 5.3 times.
This metric is useful for developing accurate forecasts and adjusting your reorder level. It’ll help you develop more effective sales targets for your employees, too.
2. Cash flow
Cash flow is the liquid capital that lets you cover daily purchases, short-term debts and emergencies. Holding onto excess stock—due to poor reordering practices—can lead to negative cash flow.
Inventory comes with a carrying cost, or the total cost of storing your items. This includes warehousing expenses like rent and utilities. You don’t want your cash tied up in slow-moving products. Generally speaking, you want the least amount of inventory possible while still fulfilling customer needs.
Holding onto excess stock—due to poor reordering practices—can lead to negative cash flow.
Small businesses should use a combination of inventory control techniques. Consider conducting year-end physical counts. Identify shrinkage and avoid discrepancies between your technology and in-store numbers.
Ongoing spot checks can also help you identify the right reorder point. That way, you’ll avoid investing funds in items that aren’t in demand or suffering shrinkage issues.
3. Operational efficiency
A small business survey revealed that 43% of businesses either don’t track their inventory or use a manual method. Although managing inventory by hand may seem simpler, it can cost you in the long run.
Why? In another survey, 62% of respondents said “human error from manual process management was the root cause of inventory fulfillment issues.” And according to the National Retail Federation, it’s estimated that “administrative, paperwork and vendor errors account for 25% of shrink.”
You can’t eyeball inventory counts and expect efficiency.
Equip your employees with accurate, time-saving tools like barcode scanners. Select seasoned employees as your counters, and establish clear policies for reporting lost, damaged or broken goods.
Another best practice is to be consistent with units of measurement to quickly identify shrinkage. With liquor, for instance, look for a restaurant POS that can track inventory in ounces, the same unit you’re serving.
4. Customer satisfaction
Inventory control and customer satisfaction go hand in hand. Stockouts lead to walkouts. More than two-thirds of small business owners said running out of stock was the number one inventory mistake that led to lost customers.
A precision inventory count ensures you’re prepared to meet customer demand. In addition to avoiding product backorders, you’ve got to monitor quality control. That means your products look great and reflect what you requested in your purchase order.
Customers want more visibility, too. 97% of consumers say it’s important for e-commerce retailers to provide actual inventory levels, such as “two left in stock.” And 81% said they want to check if an item is in stock before they visit your store. When you evaluate inventory software solutions, ask how you’d add these capabilities to your website.
When inventory control goes wrong (and how you can get it right)
Inventory optimization is no easy feat. Even retail giants with billions of dollars in resources at their fingertips run into stock control issues. Apply these lessons to your operation.
1. Target: Rushing to expand before shoring up supply
In 2013, Target opened nearly 124 stores in Canada. Two years later, Target Canada was no more. What happened? First, the company used new software that turned out to have inconsistencies. Inaccurate counts, faulty UPCs and long lead times resulted in disorganized warehouses and empty shelves.
Target chose a rapid launch over a gradual rollout, leaving little wiggle room to address problems. Furthermore, they relied on very optimistic sales projections to determine their economic order quantity (EOQ). Target wouldn’t hit its predicted break-even point until 2021 and ultimately decided to close.
How to get it right
Test your system before opening a new location. Conduct regular physical inventory counts to support your digital tools. Use your hard data to forecast sales and demand, especially if you deal with long lead times.
Growing pains are normal, but make sure your business is ready to expand.
2. KFC: Changing suppliers without a contingency plan
In 2018, KFC’s UK operation faced a fried chicken chain’s worst nightmare—they ran out of chicken. The crisis began with a switch to a new distributor with a single warehouse. A traffic accident kicked off serious delays and a series of system failures.
How to get it right
Even with a coherent inventory system and reliable suppliers, disruption happens. An ingredient shortage or bad weather could snowball into replenishment issues and upset customers. Make sure you have a backup plan for logistical snags.
If things go wrong, don’t doubt the power of a well-executed apology. KFC’s simple, clever marketing ad won back some customer support.
Alternate suppliers and a preset safety stock amount helps.
3. Walmart: Outdated inventory system and too few employees
In 2013, the world’s former largest retailer faced a $3 billion loss. There reportedly weren’t enough employees to stock shelves after labor cuts. In addition, there was a lack of visibility into stock levels and item location, causing chaos in the backroom.
How to get it right
Hire enough staff for seasonal spikes, and ask your main team if there are underlying issues with your inventory routine.
Take advantage of technology. Walmart released the My Productivity app, which gave employees access to stockroom data while on the sales floor. An app like this would help make the most of your team members each shift.
If it’s not on the shelf, your customers can’t buy it.
Enhancing your inventory control
When you optimize inventory control, you can do more with less. There’s potential to increase revenue, reduce human error and improve customer satisfaction. You’ll help your bottom line by limiting waste and maximizing sales.
Now you have a few ways to avoid error-prone methods and costly inventory mishaps. Use these tips to make sure you have the right products when you need them.