The Road to Effective Inventory Control
Inventory control is a crucial activity for anyone involved in a manufacturing, wholesale distribution or retail business. It refers to the capability of having a complete knowledge of one’s stock and a deep understanding of the forthcoming market dynamics in terms of future stock needs.
Sometimes inventory control and inventory management are used interchangeably, even if there are slight differences between the two terms: the former mostly refers to the activity of keeping track of the stock available in the warehouse and the way items are stored; the latter involves the estimates of the reorder points, the economic order quantity (EOQ, the order quantity that minimizes the total holding costs and ordering costs) and the replenishment actions that you have to perform in order to satisfy the future demand.
Companies rely on different solutions for monitoring the inventory levels in order to understand what there is in their warehouse, when the stock is going in and out and assess their current assets value and costs.
Solutions can include spreadsheets, a common but highly error-prone tool for tracking and manipulate data, or more reliable inventory management tools that provide a complete tracking for each item stored in the warehouse. The more integration and automation a system provides, the less paperwork and mistakes there will be during the activity flow.
Once your company has the tracking system in place, it’s time to figure out when to order a new stock for your items. Some common methods involve the definition of a threshold of minimum stock that triggers a new replenishment once the available stock for a product reaches a pre-set minimum level.
More sophisticated methods define a dynamic minimum stock, or reorder point , by taking into account the variability of the sales history and the future demand for each product. Of course, such type of real-time analysis is far more reliable than a static definition of the minimum stock simply based on experience or rules of thumb.
Besides the reorder point definition, the real big challenge in inventory control is to decide how much to order. The final goal of inventory management is ensuring that you will never run out of popular items: many big companies like Nike, Walmart or BestBuy experienced stock-out problems due to a failure in their inventory management processes. These failures not only caused lost sales, but they also affected their customer loyalty so the economic negative effects are even bigger than the simple cost of some out of stock events.
The demand forecasting process is vital for any successful inventory control strategy: the insights produced as a result of analyzing demand data are fundamental for estimating the amount of stock that will match your customer demands while maintaining your inventory costs low and your investments profitable.