Which Inventory Control Method is Right for Your Business?

woman on computer in bike shop stock control methods

The key to owning a retail business is understanding how to manage your inventory properly. Every business is unique, from the products you sell to the services you provide. But, you can’t sell anything unless you can answer these basic questions:

  • Where is it located?
  • How much of it do you have?
  • Where is it supposed to go?
  • Who wants it?
  • How quickly can you get more?

With an automated point of sale in place, you can quickly answer each of these questions. But, to manage your inventory, you’ll need to implement a method that fits your unique business.

Stock Control Methods

Some methods for controlling inventory are more effective than others, depending upon your business model and overall goals. The list below gives a general description of 7 of the most commonly used stock control methods for retailers.

1. FIFO (First-In-First-Out)

One of the most common methods, FIFO is straightforward and the least complicated to implement. It calculates the value of your inventory according to when products were first acquired and sold. This method works best for specialty retailers and those who sell perishable goods.

2. LIFO (Last-In-First-Out)

Opposite of FIFO, this method determines the value of inventory according to the most recently acquired products. LIFO gets a little more complicated because it ignores the costs for older stock, which creates discrepancies within the costs of goods sold (COGS). Companies dealing in commodities, such as gas and raw materials, usually use this method due to constant fluctuations in pricing.

3. Just-In-Time

Just-In-Time relies on robust sales and market data to deliver accurate forecasting. To help with this, an automated point of sale software enables retailers to order inventory when it’s needed. The benefits of this method are: reducing expenses, overstock, and waste.

4. Economic Order Quantity (EOQ)

This method uses sales and market data, as well as ordering and carrying costs to determine the most profitable inventory levels. With EOQ, smaller retailers would need to order large quantities and increase warehouse space. That’s why EOQ is best for mid-size retailers with multiple locations.

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5. Gross Margin Return on Inventory

This method focuses on three things: inventory costs, pricing, and turnover. It provides valuable insight into merchandise choices and indicates how well your inventory is being managed. Any slow performers can tie up cash and increase carrying costs. When most of your assets are tied up in inventory, you need to know how to make it more profitable.

6. ABC Analysis

ABC analysis combines product values and sales frequencies to get a better understand of which ones are the most profitable. It places all of your products into one of three categories:

  • A – High Value, Low Frequency
  • B – Middle Value, Average Frequency
  • C – Low Value, High Frequency

This method allows you to adjust pricing or marketing activities that increase demand while improving profitability.

7. Merchandise Management

Also known as Open-To-Buy, merchandise management focuses on total inventory at the beginning and close of every month. Your inventory turnover plays a major role in this method because ordering too little or too much will affect profitability. Want to make the switch away from FIFO? This method is great for any specialty retailer with seasonal products that want to reduce waste and introduce new, more exciting products.

Choosing the Right Method for Your Business

Each of the methods above is tailored to fit the unique nature of your business. Choosing the right method for you relies upon how you collect and analyze your sales data.

While most retailers begin with FIFO, they will often transition into more complex stock control methods. But, they can only get there with a fully integrated point of sale that manages their inventory and customer data. Having a more sophisticated approach to managing your inventory can be a critical element for competing in today’s tight markets.

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2020-05-21T21:16:57+00:00