Inventory Control: What Is Inventory and Why Is It Important?

Inventory is the goods, products, and materials your business holds for customer sale. Properly tracking and auditing inventory helps you reduce costs, theft, loss, and the need to keep excess stock, which consumes space and capital.

Category A inventory moves at the fastest rate and costs the least to store long term; category B items move slower but cost more; and category C items are slowest-moving and most expensive to store.l


Inventory control involves regulating and handling the amount of inventory your company has on hand. It’s about minimizing waste and optimizing sales while improving customer satisfaction levels. It is important for companies of all sizes to have an effective inventory control system in place that can adapt with the growth of the business.

Some forms of inventory control include periodic or perpetual inventory systems, warehouse organization and reordering processes. Some of the key components of effective inventory control include establishing product labels, tracking goods with barcodes and Radio Frequency Identification Device (RFID) tags, tracking stock keeping units or SKUs, analyzing sales data to forecast demand, setting reorder points and reviewing product shipments for quality and damage.

Periodic inventory systems involve a physical count of products either weekly or monthly to maintain a consistent and accurate inventory count. This is an expensive and time-consuming process that can be prone to human error. Many larger businesses use the perpetual inventory system that records and reports on stock levels in real-time using a computer program or mobile scanner. The system logs the data into a centralized database that warehouse teams can access, which reduces counting costs and saves on storage space.

Reordering is an important part of inventory control to help your business avoid out-of-stock scenarios and lost sales. It also helps keep your inventory levels at the right level to minimize expenses by ensuring that you always have enough of each product on hand to fulfill orders, and that the quantity purchased is replenished as soon as it starts to run low.

The optimal amount of inventory your business needs to hold will depend on factors such as business size, capacity and supply chain. It is also important to establish safety stocks, which are extra quantities of popular or high-demand items kept on hand to prevent out-of-stock situations. For a more efficient and cost-effective approach, some companies use an Enterprise Resource Planning (ERP) system to manage specific costing considerations like First In, First Out or Landed Cost, which provide an accurate accounting of each item’s inventory costs.

A robust inventory management system provides a clear record of the company’s full inventory, streamlines reordering, and ensures that the business never runs out of key products. It can also help companies determine how much to order, based on sales/consumption data, so that the business avoids ordering too many items that may sit on shelves for an extended period. This type of software is especially important for e-commerce businesses that sell across multiple online channels.

Inventory management software allows retailers to organize their warehouses and stockrooms. It helps them categorize stocks according to their unique characteristics, such as size and color. It also automates the process of capturing and recording each transaction, which minimizes errors. The software can also link to a point of sale (POS) system to generate automatic stock updates. This saves time and labor while ensuring that customers get the right product in the quickest possible time.

Companies should choose a system that allows them to integrate it with their accounting systems, which prevents double-entry and reduces the chances of human error. Many cloud-based integrated supply chain management (ISCM) suites offer inventory-management modules that work seamlessly with other parts of the platform, including planning, production and logistics functions.

Another key feature of inventory management software is its ability to analyze the demand for each item and measure if current stocks are sufficient to meet it. This can prevent the company from purchasing extra inventory that isn’t necessary and that comes with a high storage cost.

Businesses that have the proper inventory control system in place experience higher productivity rates. With fewer inventory mistakes to deal with, employees can focus on making more of the same product at a faster pace, which leads to increased revenue. They can also avoid running out of inventory, which is a costly mistake that may lead to the inability to fulfill customer orders and potentially result in the company being suspended from marketplaces. In the end, the benefits of a good inventory management system far outweigh any costs associated with the software itself. Moreover, the money saved on unnecessary purchases can be used for other purposes that contribute to the growth of the business.

Inventory is an expensive asset that eats up cash and requires storage, labor, and utilities to keep it on hand. Inventory control optimizes these expenses by keeping stock levels balanced between forecasted customer demand and actual orders received. This balance is a challenging process full of trade-offs and risks.

Businesses must maintain tight control of their inventories in order to save money, reduce backorders and improve fulfillment efficiency. Inaccurate inventory can result in lost customers, costly production delays and wasted warehouse space.

A company’s inventory requirements are affected by its industry, its function within the supply chain, and the type of product it sells. To maximize efficiency, many companies employ a just-in-time (JIT) approach to inventory management. This means that materials, components or ingredients arrive in the warehouse only a short time before they are used in production and finished goods don’t spend much time on the shelves after being shipped to customers.

JIT also affects how inventory is accounted for and reflected in accounting records. For example, raw material and component inventory may be recorded using absorption costing methods that allocate direct and indirect manufacturing costs to individual parts as they take shape on the assembly line. Similarly, finished goods and merchandize inventory can be recorded using costing methods that assign shipping and handling costs to the finished products. This information is used in calculating both the inventory line item on the balance sheet and the cost of goods sold on the income statement.

In addition to implementing JIT, companies must establish inventory policies and processes that balance the risk of overstocking and understocking, and that take into account the variability of suppliers. A good inventory policy starts with an assessment of the current state of a business’s processes, particularly in the order-to-delivery (OTD) process. The assessment should identify gaps and opportunities for improvement.

Some companies establish par levels for each of their products to avoid overstocking or stock outs. Others use a min-max inventory method that sets maximum and minimum levels for specific items. Finally, some companies use a safety stock that keeps an extra set of the most popular or important items on hand in case of unexpected demand or delivery problems.

Maintaining proper inventory levels is an elegant dance that must balance consumer demand with warehousing costs and supplier reliability. Stocking too much inventory eats up space, and storing too little can lead to out-of-stock situations where orders are turned away or sales lost.

A good reorder point calculator can help you determine the right balance by calculating the ideal time to place an order, taking into account factors like your lead time and safety stock. For example, let’s say your product has a lead time of four days, and your reorder point is calculated as follows: Reorder point = safety stock + Average daily usage rate / Lead time (in days)

The goal is to calculate an optimal reorder point, so that you place orders at just the right times to minimize inventory holding costs while avoiding stockouts. This is known as just-in-time inventory, and it is an important component of efficient supply chains, which aim to cut costs, improve efficiency, and increase customer service by receiving inventory only when it’s needed.

Calculating the optimal reorder point can be challenging, but there are a number of ways to go about it. The most common is to use an inventory management system that offers reorder point calculators and real-time inventory tracking. These tools will notify you when a SKU hits its reorder point, making it easy to automate the process and eliminate human error.

You should also review your reorder points regularly and recalculate them as your business grows and season changes occur. This helps you stay on top of changing demand and ensures that your reorder points are as accurate as possible.

If you want to save even more time and effort, consider outsourcing your ecommerce fulfillment operations to a 3PL like ShipBob. This can take the burden off your team so you can focus on growing your business.

In a perfect world, you could just rely on your reorder point to keep enough inventory in stock at all times, and avoid having to manually track everything in spreadsheets. However, we don’t live in that world, and if you don’t monitor your inventory properly, it’s possible that you’ll run out of products before placing an order.