Anyone who’s tasked with managing in a retail business knows — now more than ever — that they have their work cut out for them. In today’s retail landscape, consumers not only expect to find and buy the products they need on multiple channels (i.e., in-store, online, mobile, social media), they also want order fulfillment flexibility (which requires fast shipping and services like click-and-collect/BOPIS and curbside pickup).
When you’re operating across multiple channels and locations, it’s essential that your warehouse, backroom, and shelves (i.e., physical AND digital shelves) are stocked with the right products.
This is why inventory control (sometimes called stock control) is critical. You need to have the right processes, technologies, and people in place to successfully execute your inventory initiatives — and overall retail strategy, for that matter.
Below, we’ll look at the ins and outs stock control and how you can tighten up your current systems and practices.
What is inventory control?
Inventory or stock control refers to the systems and procedures that you implement to manage and stay on top of your warehouse’s stock levels.
Inventory involves tasks like:
- Organizing products in the warehouse or backroom
- Monitoring product movements and stock levels
- Reconciling physical stock with the company’s records.
Inventory management vs. inventory control
While inventory management and inventory control are closely related (and often used interchangeably), they have some important distinctions. Inventory management is a broader term encompassing everything from forecasting demand and ordering products to stocking the shop’s shelves and counting physical stock in-store. Inventory control, on the other hand, refers specifically to managing stock in your warehouse.
Inventory control best practices: 4 important steps to take
The objective of inventory control is to hold the least amount of inventory in your warehouse without compromising your ability to fulfill orders or stock your retail stores. Keeping your stock levels tight is essential for a couple of reasons:
Maximum profit. Having the right amount of merchandise with the least amount of investment in stock paves the way for wider profit margins.
More working capital. When your cash isn’t tied up in stock, you have more resources to invest in your business. Proper stock control frees up cash flow and keeps your business humming.
Highly efficient warehouses. By not stocking more than necessary, you free up space in your warehouse, which ultimately makes it easier to find and organize products. This may also lead to fewer misplaced items and less waste.
Here are some of the top stock control best practices to implement in your business.
1. Know your numbers
Inventory control involves an array of equations and calculations. You need to constantly run the numbers to ensure that your warehouse is stocked with just the right amount of merchandise.
Here are some of the formulas to keep in mind.
Economic Order Quantity (EOQ)
EOQ tells you the right amount of stock to purchase in order to keep your inventory ordering and holding costs to a minimum.
To calculate EOQ, use the formula:
EOQ = √(2DS / H)
D = Demand quantity
K = Fixed costs per order
H = Holding costs per year
Here’s an example of EOQ in action:
D = 500
K = $1,000
H = $20
EOQ = 224
Lead Time Demand
LTD is the forecasted level of demand for a product during the lead time from the supplier to the retailer. Calculating LTD is important because it allows you to determine when to order products to avoid inventory shortages.
You can calculate LTD by multiplying the lead time for a product by the average number of units sold daily.
LTD = Average lead time in days x Average number of units sold per day
So, if you sell 40 units of a product per day, and it takes 3 days for a reorder to arrive, you’ll calculate it as follows:
LTD = 40 x 3 = 120
Safety Stock (SS)
Safety stock is the level of stock that you keep to mitigate the risk of stock shortages.
To calculate it, use the formula:
(Maximum units sold per day x Maximum lead time) – (Average daily units sold x Average lead time)
Let’s take LTD data above and add the following information as an example. If you sell a maxim of 50 units for a product and the maximum lead time for that product is 5 days, then you would calculate SS as follows:
SS = (50 x 7) – (40 x 3) = 230
Reorder Point Formula (ROP)
ROP indicates the stock at which you need to order more inventory.
Calculate it using the formula
ROP = Lead time demand + Safety stock
Let’s carry on with the examples from above. If your LTD is 120 and your SS is 230, then:
ROP = 120 + 230 = 350
Inventory control KPIs
Aside from calculating your order quantities, lead time, safety stock, and reorder points, you should also measure the performance of your inventory and use those insights to inform your decisions.
Here are some of the stock control KPIs to consider.
Sometimes referred to as inventory turnover, stock turn pertains to the number of times stock is sold through or used in a given time period.
Calculate it using the formula:
Stock turn = Cost of goods sold / Average inventory
So, if your average inventory is $10,000 and your COGS is $50,000, you’d calculate stock turn as follows:
50,000 / 10,000 = 5
This tells you that you’ve sold out of the product 5 times.
Sell through is the percentage of units sold versus the number of units that were available to be sold.
You calculate it using the formula:
Sell through = Number of units sold / Beginning inventory x 100
If you have 200 units of a product (beginning inventory) and sold 185 units after a month, your sell-through is:
185 / 200 = 92%
Gross Margin Return on Investment (GMROI)
GMROI measures your profit return on the funds invested in stock. It answers the question, “For every dollar invested in inventory, how many dollars did I get back?”
GMROI = Gross profit / Average inventory
If your gross margin is $40,000 and you have an average inventory cost of $22,000 then:
22,000 / 40,000 = 1.81
Knowing is the first step to understanding what needs to be done to improve your inventory control practices and performance. To that end, brush up on the formulas above and arm yourself with an inventory software that sheds light on stock control insights you need in your business.
2. Establish, document, and audit your procedures
The key to running a finely-tuned warehouse and retail operation is to have repeatable processes that are documented and accessible to the right people. The specific procedure will depend on your business. Ideally, you’d want to establish procedures for:
- Ordering and receiving stock into your warehouse
- Retrieving products for fulfillment or store deliveries
- Counting products
- Reconciling your records
- Handling returns
- Warehouse security and loss prevention
Pro tip: It may help to create health and safety procedures to keep your products and employees safe while handling merchandise. This is particularly important during the COVID-19 pandemic. Shoppers and retail employees alike are concerned about their health, so it’s critical that you take the steps to protect them.
No matter what type of process(es) you decide to implement, the following pointers will help ensure that your procedures are followed.
Document your procedures. One of the worst things an inventory manager can do is to have their processes live in their heads. Make sure your procedures are on paper. This keeps things in black-and-white and minimizes misunderstandings.
It also increases efficiency and productivity in your warehouse. When team members have a document to which they can reference, employees and managers won’t have to spend too much time asking and answering unnecessary questions.
Centralize your procedures. Keep your process docs in a central hub. Create a single source of truth for your inventory procedures and see to it that the right people can access the info they need.
Consider storing your documents in the cloud, where users can always find the most updated version of your processes.
Audit your warehouses. Conduct regular audits to ensure that your warehouses are up to snuff. These audits are typically done by district managers, warehouse managers, or third parties, depending on the needs of the company.
Whatever the case, a successful warehouse audit requires detailed checklists so that whoever’s conducting it can objectively inspect and evaluate the warehouse. Have visual materials such as photos of WHAT TO DO vs. WHAT NOT TO DO for reference.
When the audit is complete, there should be a clear list of tasks and steps to take in the event that certain standards or procedures aren’t carried out properly.
3. Arm yourself with the right (digital) tools
It doesn’t matter how big or small your warehouse is. If you’re selling on various channels and retail stores, it’s imperative to tools that enable you to centrally manage and monitor stock movements.
Eliminate silos in your inventory control processes by arming your business solutions and platforms give you full visibility into your stock so you can make decisions and manage everything from a single platform.
Here are some of the key features to look for in inventory control software:
Ability to centrally manage stock
Your stock control software should enable you to view and manage your catalog centrally. So whether you have products in Store A, Store B, Warehouse X, etc., all those products should be manageable in your system.
Proper inventory management requires organizing stock across different locations or sales channels, so having the ability to view and transfer stock between stores, channels, or outlets is essential.
Order management and fulfillment
Make sure your inventory control software lets you track and fulfill orders with ease. If someone places an order online, for example, your platform should make it easy for you to ship items to the customer or enable shoppers to pick up in-store.
Real-time reporting and analytics
A good stock control system gives you the data and analytics you need to run your warehouse and stores. See to it that the solution can surface insights around product performances, sales, revenues, and margins so you can make well-informed decisions.
Part of effective inventory control means reconciling your physical inventory with the records you have in your system. As such, your stock control system should offer tools that make inventory counting easier.
4. Consider hiring an inventory control specialist
Inventory control is a hands-on and time-consuming job. Depending on the size of your catalog, it may be worth hiring a person (or team) to specialize in managing your warehouse inventory.
An inventory specialist is responsible for:
- Maintaining your catalog
- Keeping records of stock levels, changes, and movements (e.g., orders, transfers, returns, etc.)
- Inspecting merchandise in the warehouse to ensure they’re in good condition and are in the right place
- Ordering merchandise by filling out and sending purchase orders
- Overseeing the delivery and receiving process
- Liaising with store managers, warehouse staff, and other departments to ensure that stock levels are in check
Some of the characters and skills to look for include:
- Math skills (remember that knowing your numbers is critical in stock control).
- Familiarity with stock control equipment, including barcode scanners, RFID devices, inventory counting tools, etc.
- Comfortable with software and apps, as they’ll need to constantly launch and update your inventory platform
- Organization skills, so they can keep your warehouse in order.
Having an inventory control specialist or team can make warehouse and store management immensely easier. If stock control isn’t your strength, delegate the job to others so you can focus more on other areas of your business.
Proper inventory control is a must if you want to stay competitive
The retail landscape is more challenging than ever, which is why it’s critical to have the right data, processes, and people behind your stock control practices. Ensuring a smooth flow of merchandise in your warehouse and stores gives you the ability to carry the right products without tying too much capital on inventory.
Hopefully, the pointers above help you do just that.
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