In this article, we will discuss the basic elements of inventory management and inventory control and the difference between the two processes.
While inventory management and inventory control may sound similar and are often mistaken for each other, the strategic focus of the two processes is different. While inventory control deals with the stock on-hand or the stock lying in the warehouses and other storage locations, inventory management deals with forecasting and ordering stock. Inventory control is just a part of the overall inventory management process.
To understand the difference better, let us first learn about inventory management.
What is Inventory Management?
Inventory management or stock management deals with the ordering, storage and use of inventory including raw materials and finished goods. The focus of inventory management is to help businesses know which stock to order, when and how to order.
Inventory management begins from the procurement of raw materials and includes everything in between from there to the final sales and delivery to the customers. Inventory management is also a key part of supply chain management and it helps businesses meet customer demand better by ensuring that there is always sufficient stock available. However, it also helps avoid overstocking or ordering excess stock since that can lead to wastage. It is especially helpful for businesses dealing in perishables like groceries and vegetables. A business dealing in groceries and vegetables can use the data from its inventory management system to know exactly how much it must order and store to meet customer demand properly and avoid both excess and insufficient stock situations.
By having a proper inventory management system in place, businesses can ensure higher efficiency, increased accuracy in terms of order fulfilment and reduced expenses.
Here are the basic elements of inventory management:-
- Managing stock right from procurement to final sales and delivery to customers.
- Demand forecasting based on previous sales data to understand customer demand better. Companies that have access to inventory management data can find it easier to predict demand for specific products and make better decisions related to inventory. However, this data can also be used to adjust pricing, finding new growth opportunities and for understanding market potential.
- It helps businesses know when there is a need to replenish stock.
- Keeping track of inventory turns or how fast inventory sells in a given time frame. Inventory Turnover ratio is a key ratio reflecting business efficiency and financial health of a company.
- Confirming stock levels through regular checks of small set of goods.
- Conducting regular audits to know if the inventory counts are correct and match the data in the financial reports.
The main functions of inventory management are:-
- To help overcome uncertainty in terms of demand.
- To help businesses avoid both over and understocking.
- To help businesses benefit from quantity discounts.
What is Inventory Control?
Inventory control is only a part of the overall inventory management process. While the inventory management process focuses on managing inventory from procurement till the final sales, inventory control focuses only on the stock at hand or the stock lying in warehouses and other storage areas. Inventory control includes the daily activities which are a part of managing inventory lying inside the warehouse. These activities include receiving, storage and transfer of stock as well as order fulfilment and handling returns.
An important part of inventory control is to take control of inventory rotation. However, the control of inventory rotation is also essential to ensure an overall effective inventory management process. It is basically how you define the flow of stock or which items are used and when for fulfilling customer orders. Generally, it depends on your product mix and type of business that which inventory control method you use.
Some of the inventory control methods used commonly across the industry are:-
LIFO: Last in first out. The products that come the last to the warehouse are moved first. However, it can also lead to obsolescence since older products may keep lying longer in storage unsold. It cannot be used in the case of perishable goods.
FIFO: Fist in first out. This inventory control method dictates that the products are sold in the order they arrive at the warehouse. The products that come first are moved out first and in the order from older to newer. It is a popular inventory control method since it helps avoid obsolescence and wastage.
FEFO: First expire first out. In this inventory control method, the focus is on minimizing wastage and obsolescence by selling inventory in the order of expiry date. The items that are going to expire first are sold first.
Warehouse organization or how products are organized in various categories at the warehouse is also a part of inventory control. Companies can categorize items based on date or product type for storage. When new products come to the warehouse, the staff scams the RFID tag or the bar code, where each product has a unique code assigned to it. The warehouse staff check the inbound shipments and note down the important details. Similarly, when the product is moved out or sold, the fulfilment department notes it down and packs the products for delivery.
In case of a vendor managed inventory system, the burden of managing inventory shifts from the retailer to the vendor or the supplier. It is a type of agreement between the retailer and the supplier, where the supplier is responsible for managing, maintaining and optimizing their inventory while it is in the retailer’s possession. The retailer does not initiate a purchasing order in this system but shares inventory data with the vendor and the vendor is responsible for order size and frequency. In case of the vendor managed inventory system, it is the vendor who makes the calculations for reordering and replenishment based on demand forecasting and lead times. One important benefit of VMI or Vendor managed inventory is that some of the risk is shared by the suppliers and when done well it can be profitable for both the supplier and the retailer.
The basic elements of inventory control are as follows:-
- Storing stock and tracking its location within the warehouse and keeping the warehouse organized.
- To make sure that the stock is stored in good condition and to prevent wastage or spoilage and to make sure that inventory does not expire and gets used before expiry date.
- Speeding up ordering fulfilment by storing the most popular items closer to the packing area.
The focus on inventory control has increased across firms since it offers several advantages. Apart from higher sales and revenues, better inventory control also helps maximize customer satisfaction while keeping costs under control. When businesses track stock regularly, it helps avoid stock outs and back orders. Businesses can reduce overstocking or excessive stock and the risk of having obsolete inventory in storage. It helps prevent wastage or spoilage and reduce the additional storage costs that arise from obsolete inventory or inventory held in stock for longer without sales.
A few last words:
Inventory management is essential for any business that deals in stock or inventory. However, many times people confuse inventory management and inventory control for the same processes. The two are different and inventory control is a small but critical part of inventory management. Due to the availability of digital tools and software both inventory control and inventory management have become easier for businesses. The main difference between these two processes is in terms of their focus. While inventory control mainly deals with the inventory in storage, inventory management has a much larger focus and it deals with stock from one end to another. Inventory management deals with stock from the moment it is sourced to the moment it is sold or moved out. It has a much larger strategic focus compared to inventory control and includes planning and forecasting. Apart from managing supply and demand, the focus of inventory management is also supply chain management and higher customer satisfaction. However, it is equally important for managers to learn that inventory control when done right can lead to a superior customer experience and higher customer satisfaction, apart from increased operational efficiency.