Inventory Control: The Systems and Procedures for a Bright Business Future
AKA stock control,
AKA “oh no not again”.
If the phrase inventory control conjures up feelings of dread and despair, you’re not alone. In fact it may be an issue that some business owners avoid altogether. They don’t employ any effective inventory control techniques, and just hope for the best.
Or maybe your stock control is “good enough”, but certainly nothing to shout from your workshop roof about.
Perhaps you feel that inventory control systems are overrated. Things get to where they’re supposed to most of the time and that’s okay.
But if you don’t have adequate control over your stockroom, then this could lead to stock emergencies way too often.
In short, it pays to get this right sooner rather than later.
So let’s get to it.
Get to know the ins and outs of controlling your inventory, including how to implement some killer techniques in your small business, and feel the daily pressure of stock management being lifted away.
What is Inventory Control?
The terms inventory control and inventory management are often used interchangeably.
In fact they are separate entities: think of the former as a part of the broader discipline of inventory management.
The primary objectives of control over inventory are to know where everything is and making sure it always gets to the right place.
Inventory management deals with inventory costing, buying policies, and selling price.
A good analogy of stock control is the human heart. I bet you never thought you’d be reading about biology in this article, right? But it relates to the topic of inventory control perfectly.
To say the heart’s job is to pump blood is putting it very simply. The heart not only pumps blood to every organ in the human body, but also dynamically maintains the correct volumes.
If you exert your body more than usual, then the heart must compensate and begin pumping blood everywhere at a faster rate.
Everything runs in balance. The more you use it, the stronger it gets. And if things aren’t regulated properly, then disaster can occur.
Inventory control focuses on:
— Keeping track of stock you already have: knowing how much you have and where it is;
— Stock logistics — organizing the stock in your warehouse or storeroom so transport time is optimized, in turn reducing lead time; and
— Correct storage of goods — for example, if wood is not stored at the correct temperature, or if the humidity is off, then this leads to it becoming obsoleted faster than you can use it. This is also a concern of health and safety — is everything stored and transported in accordance with best practices?
In contrast, inventory management is concerned with:
— Stocking the right amount of inventory to minimize holding costs and associated waste;
— Making sure you get the best deals for stock - I.e. Managing economic order quantity (EOQ) - a huge subject by itself. This is reflected in your overall Cost of Goods Sold (COGS); and
— Inventory Costing: Choosing the right costing like LIFO, FIFO, or MAC (also part of COGS). The inventory management technique can change the costs you report on your financial statement, like how much you spend on raw materials (part of manufacturing cost).
In addition, there is one more term that should not be confused with either of the above: Operations Management.
This is the catch-all term for ultimate business efficiency. Sounds intimidating, but your inventory control and management both funnel into your operations management.
In short, operations management involves inventory management, quality control, and production scheduling and planning.
Think of operations management as a big circle that encapsulates your whole production process – the day to day of your business.
Within that is a smaller circle – inventory management.
And within that circle, there’s another smaller circle called inventory control.
This specialized area is central to your operations and has repercussions across your whole business – so stay sharp.
Inventory Control Methods
These are the inventory control best practices that every manufacturing business should be implementing.
Think of it as a basic checklist:
It’s all about the fundamentals. This is the bread and butter of what you need to be doing.
These are always worth going over as these are your best money and time-savers.
Organize all your products logically — The best way to do this is to generate an SKU for each of your product variations. This lets you categorize your stock so you know where to put everything without thinking.
Set your safety stock — This is extra stock you keep around in case there’s a temporary supply chain breakdown or bottleneck. It lets your workshop keep going when you have a supply-chain issue, so it’s not such a big deal. The amount of safety stock you need may not be as much as you think. Apply a safety-stock formula to find an optimum level.
Set reorder points — These are numerical thresholds that tells you when you need to order more of something. The different stock items you keep will need different reorder points because you go through them at different rates. Lower reorder points lower your stock investment but increases the risk of an out-of-stock situation. So, incorrectly setting a reorder point may interrupt your production flow. You have the reverse problem if it is set too high. Finding the right software can help you stay on track.
Cut your dead stock — We've all done it: held onto something for too long because you never know when you might need it…But there are some things that all the proverbial rainy days in the world will never shift. And guess what? All those grand pianos sitting in the back of your warehouse aren’t exactly “harmless”. Every heard of carrying costs? This useless stock is like an unwanted guest that won’t leave. It’s time you evicted it and freed yourself of the stock that’s weighing you down.
Scale up and go multi-channel — So what to do now everything’s working like a well-oiled machine? Have a break? Well, sure you’ve earned it, but remember you can’t put your feet up forever. And who would want to? This is just the beginning. Your small manufacturing business can get even more awesome. The beauty of an effective inventory control system, is that when done correctly they scale up without you having to change your plan again.
So, when you’ve caught the business bug, and want to keep riding the wave of your additional success, then you can increase your sales by opening up new sales channels.
This is where things get really fun.
Examples of Inventory Control Systems in Action
We’ve all heard of elite-level inventory control techniques being used by famous businesses. H&M, Zara, Amazon, Apple...the list goes on. Well, anyone in the business world anyway.
Their customers flock to their stores without knowing how they do what they do. They just know they like it and want more.
This is the core of good stock control. Its effects will resonate across your entire business.
Because good inventory control is the science and art of reducing waste to as close to zero as you can get.
But what about for the small manufacturer, maker, or craft workshop?
These are the unsung heroes of immaculate inventory control.
They do their own thing and do it excellently.
Such small manufacturing businesses don’t have the capital to even buy 80% of their stock well in-advance.
They take the most flexible inventory control techniques from larger businesses and dial it up.
For example, the manufacturing startup Thalia decided they wanted to create guitar capos that are a cut above the rest.
They had neither the cash or the location to store massive amounts of stock for their custom accessories.
So they adopted a clever inventory control system. It involved carefully sourcing the materials needed, and outsourcing aspects of their manufacturing to keep work-in-progress down.
Of course, the products get finished in the USA, and their careful control of stock made sure they didn’t get overwhelmed in the early days.
They are a success story of lean manufacturing.
They made the right inventory control choices, and gave their business a bright future.
Inventory Control Challenges for Small Manufacturing Businesses
As the old saying goes: “Nothing worth having comes easy.”
The same goes for effortless inventory control. It takes time for you to find out what works best for your business. Your policies depend on many factors. These include your industry, the cost of your raw materials, the amount of MRO you require, and the frequency and average size of your sales orders.
That means you can spend your whole life reading and studying about inventory control, but the only way to master it is to get your hands dirty.
You have to put the effort in to fine tune your stock control.
Here are the Core Areas in which to exercise inventory control at all points in your business.
Raw Materials Availability — there must be enough available to ensure that new manufacturing orders can be begun to keep your order fulfillment cycle at a good pace. Once your raw materials come in, it is your job to allocate them to get the maximum value from every cent spent on materials. This means prioritizing manufacturing orders and completing the highest in your queue before you move on.
Work-in-progress — it's best to keep the amount of inventory being worked on to a minimum to further reduce your investment in inventory. Split up production into cells that work on different sub-assemblies to reduce lead times between each operation (cleaning, machining, and so on). This can be done in many ways: reducing machine setup time, inventory travel time, and employees moving between workstations, and starting new orders.
Finished Goods Availability — If these are readily available, then super-fast order fulfillment awaits. Companies that do this can justify higher prices. Customers won’t mind paying to get stuff quicker. Of course, it is difficult to find a happy compromise. It's a challenge to balance the amount of allowable backorders with the amount of on-hand product.
Bottlenecks — There is almost always a bottleneck lurking somewhere in a workshop, even if it is not obvious at first. Inventory control can be used to alleviate these. One method is to put an inventory buffer directly before a bottleneck. This allows a bottleneck to keep running, while other parts of your process struggle, so there are fewer delays when everything gets up to speed again.
Backorders — This is an inventory technique that gives you a second chance in the event of a out-of-stock situation. But be careful, if you use this as a crutch, your customers will start to look elsewhere. Good inventory control is making sure the number of backorders you make a year stay under a reasonable threshold.
9 Rockstar-Level Inventory Control Techniques
Track supply and demand in real time — use perpetual inventory and track your inventory at all times. This lets you fulfill one of the main goals of inventory control – to know where your stock is 24/7.
Establish stock control policies — This includes maximum and minimum inventory levels, reorder points, backorder allowance and so on.
Have an emergency plan — make sure you know it backwards and your staff are well drilled to cope with all eventualities.
Prepare an inventory budget — including carrying costs, expected inventory turnover ratio. Stick to it, don’t go over it by practicing make to order etc.
Split your inventory up — don't think of your stock as a single entity. Figure out what your fast-moving stock is. It could be that 20% of your SKUs are contributing to 80% of your revenue. For the rest, does its infrequent revenue justify the increased carrying costs? Inventory control models assume that demand for an item is not dependent on demand for other items in your stock. Concentrate on your high-turnover stock and reduce your low turnover stock.
Resist temptation — things like supplier discounts – can cost you more money in the long run because you need to find a place to store the extra stuff. The extra minutes it takes your staff to locate materials adds up to hours each week. Of course you are paying for these hours of zero-return.
Barcoding — This is fairly easy and cost-effective to set up. It integrates with your point of sale system (POS) to instantly track what’s going in and out of your workshop.
Account for non-sale stock adjustments — Adjustments could be returns which will happen at some point or other. Another way could be gifts, like charitable donations. You need to adjust your stock by putting in a zero-value sale in your inventory control system. This will update it to the correct level.
Implement a cloud-based system — You can keep control of inventory levels from anywhere.
The Importance of Inventory Control in Your Business’ Future
Forget Excel formulas for inventory control.
We all love old-school stuff: choppers, faded rock’n’roll T-shirts, and 80’s nostalgia are all great, but when something so serious is at stake, it’s best to go modern.
Modern doesn’t have to mean complicated.
In fact, modern software is simple, sleek, and gets the job done.
Anyone who has tried to use an inventory control spreadsheet might have realized that it’s an oxymoron.
The verdict has been passed: over 88% of business spreadsheets have at least one mistake in them.
Say a huge sales order comes it for your guitar accessory business. You open your spreadsheet to see that you have enough of your raw materials in.
Stainless steel. Check.
Hard maple. Check.
Springs, nuts, and other MRO. Check.
Everything’s perfect, and your staff are ready to put all this into action first thing tomorrow.
But when they start, they find out that they don’t have enough maple to complete the order. In the rush of completing the last order, the stock level had not been updated.
Ordering more will now just hike up your lead time and delay your whole workshop production.
You can open a backorder, but this is a band-aid solution that doesn’t address the root cause.
Why not prevent these occurrences in the first place?
Try out specialized inventory control software with the methods outlined above, and your stock counts will no longer be vulnerable to errors.
Your stockroom is the heart of your manufacturing business.
Don’t overwork it or neglect it — and it will keep your business ticking on for good.
Katana keeps your finger on the pulse of your business — nothing happens without you knowing.
Get peace of mind knowing you can hit your sales targets without being let down.
Try Katana for free and see how it’s done.