How can you choose the best inventory control method for your business?

1 Periodic inventory system

This method involves counting your inventory at regular intervals, such as monthly, quarterly, or annually. You record the cost of goods sold (COGS) and the ending inventory value based on the physical count. This method is simple and inexpensive, but it does not provide accurate and timely information about your inventory levels and movements. You may run out of stock, overstock, or lose track of inventory shrinkage (the loss of inventory due to theft, damage, or error).

2 Perpetual inventory system

This method involves updating your inventory records every time you buy or sell a product or material. You use a barcode scanner, a point-of-sale system, or an inventory management software to track the quantity and cost of each item in real time. This method gives you more visibility and control over your inventory, as you can monitor your stock levels, reorder points, and inventory turnover. However, this method requires more investment in technology and staff training, and it may still have discrepancies due to human error or system failure.

4 Economic order quantity

This method involves calculating the optimal order quantity that minimizes your total inventory costs, including ordering costs, holding costs, and shortage costs. Ordering costs are the expenses associated with placing and receiving an order, such as shipping and handling fees. Holding costs are the expenses associated with storing and maintaining inventory, such as rent, utilities, insurance, and depreciation. Shortage costs are the lost sales or customer dissatisfaction due to stockouts. The economic order quantity (EOQ) formula is:

EOQ = √(2 x D x S / H)

where D is the annual demand, S is the ordering cost per order, and H is the holding cost per unit. This method helps you balance your inventory costs and avoid overstocking or understocking. However, this method assumes that the demand, ordering cost, and holding cost are constant and known, which may not be realistic in some situations.

5 Just-in-time inventory

This method involves ordering and receiving inventory only when it is needed, rather than keeping a large amount of inventory on hand. You coordinate with your suppliers and customers to ensure that the inventory arrives just in time for production or delivery, reducing your inventory holding costs and wastage. This method improves your cash flow, efficiency, and quality, as you eliminate excess inventory and defects. However, this method requires a high level of trust and communication with your suppliers and customers, as any delay or disruption in the supply chain can cause stockouts and customer dissatisfaction.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?