Types of Inventory Control
The relationship you have with your customer depends on how well you control and manage your inventory. As you create and distribute products customers have a demand for, your business is responsible for providing the promised type of inventory where and when you said it would be available.
A healthy inventory management system is key. You need to be capable of moving product quickly and efficiently where it’s needed and know where all product is at any given point in your supply chain. Problems within inventory management can hurt your relationship with customers and lead to a damaged reputation and a decline in sales.
But these risks can be mitigated with the right systems and efficiencies in place. Inventory management works when you put tools and processes in place that create systematic organization across your supply chain.
Here, we’ll look at the different types of inventory control businesses can access to match their unique products, scope, and needs. The overall goal is to understand how to better organize and track products in a way that doesn’t put added strain on your already-complex distribution systems. In fact, by adapting these tools to individual parts of your supply chain, you might be able to eliminate or simplify processes that are bottlenecking your overall process.
What is an inventory control system?
Inventory management can add or subtract from the profit margin of your product. Every piece of inventory that goes through your supply chain is subject to additional costs based on how efficient your processes are. For example, the same brand, quality, and size of a hammer could be less profitable based on any number of factors that add expenses to the distribution cycle. The product isn’t different—but the process is. For a large-scale operation, these extraneous process expenses add up into real loss that could affect the health of your business.
Avoid these costs with good inventory management in supply chain management, ensuring your process starts with accurate product levels.
An inventory control system provides organization and tracking for all inventory at every stage of the process—from raw materials to a finished product that’s available to sell to your customer. This creates transparency so you can eliminate unnecessary processes and identify waste, key tenets of many efficiency philosophies like Six Sigma.
Inventory tracking and classification are inventory control techniques that help determine the type of inventory control that’s appropriate for your business.
What are types of inventory?
One of the main objectives of inventory control includes determining where inventory is and what purpose it has in the supply chain. So, inventory is classified differently, depending on its current function.
For example, one primary inventory distinction in supply chains is the difference between stock and sold product. Note, stock here references “reserve” inventory—or replenishment inventory—while sold product might refer to product that is purposed to meet expected retail demand.
We’ll categorize inventory into two main buckets: manufacturing and distribution. Manufacturing inventory not only changes in purpose, but in physical form, so this will help us distinguish the differences.
Raw Materials – These are the unprocessed materials that will be manufactured and manipulated to eventually create finished goods. Raw materials are still considered inventory and must be tracked, organized, and ordered to meet demand—it just happens on the opposite end of the supply chain.
Work in Process – These are unfinished goods that have begun the manufacturing process but can’t yet be sold as finished goods. We track this type of inventory because the processes involved can be time sensitive and can rely on other raw materials or work in process inventory to be completed first.
Finished Goods - Finished goods are ready to be distributed and sold to customers. These have completed all manufacturing processes and will now be classified based on their purpose within the supply chain.
Transit Inventory – Also known as pipeline inventory, this accounts for inventory that is being transported from one location to another, often by train or another transit method. This is a critical classification because it accounts for two high-value processes: cost of shipment and transit time. It adds cost to a product to ship it across far distances, and it takes time—days if not weeks.
Buffer Inventory – Buffer inventory, or stock product, protects your business from running out of product should sales outperform forecasts. This acts as a reserve cushion that allows you to fulfill unexpected demand without overloading your system or stock locations.
Cycle Inventory – This is the stock you keep on hand to meet forecasted and expected demand. This product is typically put on-hand prior to being purchased so you can save on purchases in batches or full-package quantities based on forecasted demand, not individual orders.
Anticipation Stock – For this, think about retail stores and distribution centers that plan for holiday sales increases by hiring seasonal labor and increasing stock. Product that is stockpiled prior to a holiday or particular season is known as anticipation stock, or seasonal stock.
MRO Inventory – Maintenance, repair, and operation inventory. These are the goods and supplies used to complete supply chain processes, including the equipment used for manufacturing and distributing products and maintaining facilities.
What are the two main types of inventory control systems?
The two main types of inventory control methods are perpetual inventory and periodic inventory. Both are widely used across industries, and businesses often choose one over the other due to the size of their inventory and scope of their distribution model (rather than one system functioning better than the other).
For example, periodic inventory is better suited for small businesses who have fewer processes and generally a reduced amount of stock to handle opposed to large-scale businesses that operate across multiple distribution centers.
Perpetual Inventory System
Perpetual inventory systems are designed to record and manage inventory data in real time, and this is done by auditing inventory at every point of contact in the distribution cycle, documenting each time inventory is received, moved, stocked, or sold. This recursive process continually updates your inventory so it essentially gets double-checked each time it goes through a different process.
We know mistakes, waste, and damage occur as inventory moves through the supply chain. With perpetual inventory systems, you can account for exactly where those mistakes happen during the process. In this model, inventory receives some kind of scan—through barcode, tracking number, or radio-frequency scanner—at each point in the process to confirm it has moved locations and remains intact.
The downsides to perpetual inventory systems are they generally require more effort, take longer, and are more costly to maintain. For example, your labor requires more training or equipment, and a typical process takes longer because it includes processes like cycle counts or inventory audits.
Periodic Inventory System
A more cost-effective system to maintain, the periodic inventory system operates with a before-and-after approach that’s based on scheduled inventory audits. For example, inventory might be checked periodically (once a month, for example), and at that point your inventory data would be corrected to reflect any fluctuations due to human error, damage, or waste.
Companies benefit by only performing an audit once every month, quarter, or year. This greatly reduces the technology, labor, and time required to perform perpetual inventory audits. However, this means your system inventory data could remain incorrect for a longer duration until the scheduled audit is performed.
This might not seem like such a big deal, but what happens if the incorrect inventory amount leads to a loss of sale or delay of restock—or you provide customers incorrect ordering information? In these situations, it helps to perform these scheduled audits as frequently as possible and to identify other factors that might cause inventory errors.
What are the different types of inventory control methods?
Many tools are available within most inventory management systems that will increase accuracy and efficiency while reducing errors. To give context with some inventory control system examples, consider the following three processes common to most inventory systems:
FIFO – An acronym for first-in-first-out, FIFO refers to priority of receiving and picking: the first to arrive at a stage in distribution is the first to be processed and shipped out. This receiving and inventory process helps reduce waste due to expiration and moves product through your systems without interruption.
Min-Max/Reorder Point Formula – Putting in place a minimum and a maximum for required stock prevents no-stocks or over-stocking. This way you know when to order more based on historical data including shipping times, demand, and usage.
Batch Tracking – This is a form of tracking that consolidates and organizes a set of goods that were produced together, at the same time, typically from the same materials. This helps you keep track where goods came from, where they are heading, and when they might expire.
What is inventory management and its importance?
The above are just a few of the many strategies that can be employed to improve overall inventory management. While specific to receiving, auditing, and distribution processes, these tools effectively reduce the cost of getting product to customers who demand it.
Inventory management comes down to tracking capability and maintaining accuracy. Tracking helps you identify when and where inventory processes need to be implemented, improved, or eliminated. Accuracy ensures you have quality product, accurate inventory, and can meet customer demand. Together, these create pillars for healthy inventory management.
Businesses are wise to implement new ways to improve tracking and accuracy, and that’s one way that DuraMark Technologies adapts their labeling and printing technology to help inventory management.
DuraMark Technologies helps companies improve their inventory management by helping label information onto goods and products in the form of SKUs, QR codes, or barcodes. Keep your inventory organized and accurate with systematic labeling. Track product throughout the supply chain with durable barcoding.
Don’t risk inventory errors that could be prevented with simple strategies like effective labeling and tracking. If this is something that could benefit your business and distribution model—or if you have questions about DuraMark’s solutions—contact us today to learn more about how their solutions work within any supply chain model.