Which Type of Inventory Control Method Is Right for You?

By: André Nel

June 2017

To meet customer needs, avoid waste, and boost overall profits, your business needs the right inventory control method. Without good inventory control, you can squander money storing products you don’t need or not have enough stock to satisfy your customers’ demands. You also run the risk of goods spoiling or becoming obsolete before they are sold. Inventory control methods allow you to apply proven techniques to minimize these possible downsides while managing inventory efficiently.

Seven Top Inventory Control Methods
Manufacturers, grocery stores, clothing retailers, and other large businesses often use a combination of inventory control methods to handle inventory. Therefore, be prepared to blend systems to create the control method you need.

1. ABC Inventory Control
In this system, you divide your inventory into three different baskets depending on customer demand and usage. For your fast-demand A products, you’ll calculate the appropriate number of items to keep in stock. You’ll make those same calculations for your medium-demand B products and low-demand C products.

You can easily combine ABC inventory control with other inventory control methods by picking the best inventory control method for each of your three types of products.

2. Fixed Quantity
In a fixed quantity inventory model, the level of stock is followed continuously. When it reaches a pre-determined level, you place an order for more stock. In most cases, the inventory management system automatically orders more inventory.

Fixed quantity inventory models rely on your ability to monitor your inventory closely. It also assumes that other inventory variables, such as sales and lead time, remain constant. 

3. Just in Time
To implement a just-in-time inventory control method, you order stock a few days in advance of when you anticipate selling it. This type of inventory control method is helpful if you need to decrease your stock for cash-flow purposes. 

Of course, the just-in-time system is risky because it doesn’t allow for shipping or production delays. If you rely on demand forecasting to order products, you also risk buying too much or too little inventory. Also, any occurrence that causes a delivery lag could result in a lost sale. For this reason, most businesses use the just-in-time control method for high cost or specialty items.

4. Minimum/Maximum Stock Levels
The concept of the min/max system is simple. You decide an upper and lower inventory limit for each product in your system. When your stock his the lower limit, you buy enough of that product to reach the upper limit. 

The min/max method is easy to use, but you do run the risk of running out of products while waiting for them to arrive. It’s also possible to set your upper inventory limit too high, which would lead to overstocking. Accurate sales forecasting and sales cycle identification will help you determine exactly how to set your upper and lower limits.

5. Order-Cycling System
This system requires that you inventory stock every 30, 60, or 90 days (or another predetermined period). You then order products for immediate delivery that are likely to run out before your next inventory.

While this system might work for businesses with limited inventory, larger companies will waste a lot of time conducting inventories. It also requires a very experienced cost accountant to place orders.

6. Two-Bin System
With this system, you divide each product into two bins. The first bin holds the majority of your stock, and you use that bin to deliver goods to customers. When the first bin is empty, you order more stock, and use the second bin to fulfill orders until the new stock arrives.

The two-bin system requires that you know how much to stock in the second bin to avoid running out entirely. You should also make plans to rotate stock from the second bin to the first bin to prevent spoilage.

7. Vendor-Managed System
Vendor-managed systems allow you to rely on the supplier to keep track of your inventory and bring additional stock as necessary. If you’ve ever been shopping at a grocery store while the Frito Lay supplier stocked chips, you’ve seen this system in action.

If you have a professional vendor who knows how to stock your business correctly, this inventory system can be ideal. However, this type of system requires that you rely on your supplier.

How to Choose Your Inventory Management System
Once you know how you’re going to control your inventory, it is important to pick some software to help you do it efficiently. An Excel spreadsheet won’t be enough to track your inventory, but many inventory management systems are affordable and easy to use. Before picking an inventory management system, make sure that you can answer yes to the following questions:

  • Does the system offer custom-set alerts and notifications, so I’ll know when I’m running low on inventory?
  • Is this a cloud-based system? Will I be able to access it on my computer, tablet, and phone at any time?
  • Does this inventory management system offer bulk processing, so I won’t have to complete the same task over-and-over again?
  • Can I import my existing data directly into the system? If so, is it compatible with my current inventory system?
  • Can I use a barcode scanner to keep track of inventory, so I won’t have to waste time entering numbers?
  • Will the system automatically convert between different units of measurement, such as the number of cases versus the number of products?
  • Can this system grow with my business as my inventory needs change?
  • Will this inventory management system provide inventory statistics, so I can make choices about what to continue to stock and what I should discontinue?

Maintaining Your Inventory Management System
Accurate information is critical to making sound management decisions, For stock, this requires regular comparisons of quantities reported in the inventory management system with physical inventory (inventory counts). Two methods are commonly used, either separately or in combination:

1. Cycle Counts
A cycle count program is a system where not all items are counted every cycle, but over a period of one year, every item will be counted at least once. Higher priced and faster-moving items will be counted multiple times a year.

2. Periodic Full Counts
These counts are planned to include every item in inventory at the count date and generally requires operations to be stopped. This is more disruptive to operations than cycle counts, so full counts will be performed less often increasing the risk of errors in the inventory management system going undetected.

Having a reliable inventory control system demonstrates your ability to manage an important aspect of your business. By taking some time to establish best business practices for inventory control, you’ll be able to avoid costly mistakes. Contact Goldin Peiser & Peiser for additional information on this topic or to discuss other ways to increase revenue in your business.

« Back To eNewsletter Home

16800 N. Dallas Parkway, Suite 240, Dallas, TX 75248   |   Main # 972-818-5300   |   Toll Free # 888-346-5346  |   GPPcpa.com