Three Reasons Inventory Control Matters So Much (and Three Related Metrics)
Inventory control matters. It matters a lot.
Here are three key reasons why having control over your inventory is so important, followed by three related metrics you need to know about.
1. You Can Avoid Not Having Enough Stock for Order Fulfillment
It is easier to stay in control of inventories than ever before thanks to inventory software. In fact, many software options that are available for inventory control come with multiple other useful features.
For instance, the brewery software from Ollie enables users to manage order processing, production, customer relationships, and payments, in addition to inventory management.
However, even if you are using inventory control software to automate processes and provide reports, it is important that you keep yourself updated about your inventory to ensure operations run smoothly.
One of the key reasons why inventory control matters so much is you need to avoid stockouts.
If you do not maintain the right inventory levels, you could find you have run out of stock when customers order items. In turn, that means you would lose out on sales. No business wants that.
An efficient inventory control system always tracks the quantity of a product that you have in stock and forecasts how long your inventory will last, based on your sales activity.
2. You Can Avoid Overstocking
Just as important as ensuring you always have enough stock to fulfill orders is making sure you do not have too much stock.
Overstocking presents multiple problems, but the main issue is this: when you have too much of a certain product line, it means it is not selling. If it remains unsold, you would have to discount items or even write them off, which will harm you financially.
Some items go out of style. Others become obsolete. So, it is important that you do not have more items in stock than you can sell in a timely manner.
Furthermore, excess inventory needs to be stored, audited, and handled, which will always be costly.
3. Without Sound Inventory Control, You Will Encounter Working Capital Problems
When inventory sits on the shelf, you will encounter working capital problems.
For example, if you pay $20 for a product from a supplier, with the intention of selling it on for a higher price, if the item sits on the shelf, the value of that product will be locked up in your inventory when that $20 could have been used elsewhere in your business.
So, by managing your inventory well, you can also manage your working capital well.
Metrics Related to Inventory Control
To help you stay in control of your inventory, it is important that you are familiar with related metrics.
Here are just three that you need to know about.
1. Inventory Turnover
This refers to the number of times your inventory is sold within a designated time period, such as a year.
If you have a low turnover, it could be a sign that you are overstocking.
If you have a high turnover, it could mean you have inadequate stock because you have underestimated demand.
2. Customer Order Fill Rate
The customer order fill rate tells you how well you are servicing your customers.
It refers to the percentage of your orders that get to customers on time.
3. Cost of Carrying
The cost of carrying is the percentage that represents the money you spend on inventory overheads each year.
Carrying costs include both fixed and variable costs, such as storage, handling, damage, and obsolescence.
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