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Leading Approaches to Inventory Control in Retail

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Did you know US-based retailers sit on approximately $1.43 in inventory for each $1 of sales they make? (Supply Chain Digest)

This is because an increasing number of retailers are holding excess inventory to guarantee they can fulfill all customer orders and avoid stockouts. However, this is problematic as capital is locked up in excess inventory, and inaccessible for other purposes, such as investing in technologies that enhance efficiency or boost productivity.

Therefore using effective methods of inventory control in retail is essential for profitability and growth.

Let’s explore the ins and outs of inventory control in retail, starting with what it pertains to and what it does not. 

What is inventory control in retail?

Inventory control in retail is the process of assessing inventory stock levels through:

  • Monitoring and managing
  • Order management (ordering, receiving, storing products)
  • Product tracking
  • Record keeping

In other words, it’s all about ensuring that you have the right products, in the right quantities, at the right time, and in the right place.

So, retail inventory control focuses on the day-to-day operational aspects of managing stock.

Now, you know what inventory control is in retail, you may also have heard inventory management used interchangeably, but they’re actually not the same thing.

Let’s dive a little deeper to see why.

Inventory control vs inventory management: Key differences

As we just noted, inventory control in retail primarily focuses on the operational aspects of managing inventory.

Retail inventory management, on the other hand, is a broader concept that includes inventory control, as well as other strategic aspects of managing inventory.

Inventory management also encompasses:

    • Demand forecasting
    • Purchasing
    • Allocation
    • Replenishment

So, inventory management aims to align inventory decisions with the larger business strategy and goals, maximizing profitability and customer satisfaction. The concepts of inventory control vs inventory management are both essential for retail success.

Now that we understand the difference, let’s dive deeper into the significance of retail inventory stock control.

Why is inventory control important?

Inventory control in retail is important because a well-executed inventory control system delivers valuable benefits to your retail businesses, which makes your business stronger and more profitable in the following ways:

depiction of retail inventory control

Gains

Improved cash flow

By maintaining optimal stock levels and reducing excess inventory, you can minimize the cash tied up in unsold goods, improving your overall cash flow and financial health.

Enhanced customer satisfaction

When customers can consistently find the products they want, they’re more likely to become loyal, repeat shoppers. Effective inventory control equals happy customers.

Reduced stockouts and overstocking

Both stockouts and overstocking can hurt your bottom line. Inventory control helps you strike the right balance to avoid these costly scenarios.

Lower operating costs

Efficient inventory control can lead to reduced storage, labor, and handling costs, contributing to a leaner, more profitable operation.

Conversely poor inventory control for retail stores and online leads to ongoing problems that affect your profitability and result in a variety of losses.

Losses

Stockouts 

Running out of products means unhappy customers and lost sales.

Overstocking

Too much of a product leads to higher storage costs, waste, and even obsolescence

Decreased cash flow

When your cash is tied up in unsold inventory, it limits your ability to invest in other aspects of your business.

Lower customer satisfaction 

If customers can’t find the products they want or experience stockouts, they may shop elsewhere, and you’ll miss out on building loyalty.

Increased operating costs

Inefficient inventory processes result in higher labor, handling, and storage expenses.

Wasted resources

Inadequate inventory control can lead to more time and effort spent on managing stock, taking resources away from other vital business tasks.

So, the question arises, how do you get the gains and forego the losses? The answer lies in the inventory control methods you apply–and there are several.

Popular retail inventory control methods

Leading retailers engage in any combination of the following inventory control methods to manage their stock. Yet, each method can be further improved with the use of modern technology, like AI-driven retail analytics.

Here are some of the more popular retail inventory control methods, and how they’re improved with AI-driven analytics:

1. Just-in-Time (JIT) Inventory Control

This method focuses on ordering and receiving products only when they’re needed, reducing the amount of inventory kept on hand.

This approach has several advantages:

    • Lower storage costs
    • Reduced risk of items becoming obsolete
    • Improved cash flow

JIT is not without its challenges though as it requires close coordination with suppliers and a deep understanding of customer demand patterns.

However, AI-driven analytics dramatically boosts the JIT method and addresses those challenges because it delivers:

Accurate demand forecasting

Precision is needed for retailers to order the right products in the correct quantities at the perfect time, especially in the JIT approach. AI-based analytics analyzes vast amounts of historical sales data, customer behavior patterns, and external factors (like seasonality or economic trends) quickly and so provides demand forecasts with the accuracy needed.

Real-time inventory tracking

This feature is absolutely necessary when using JIT. With real-time inventory tracking by AI-based analytics, retailers are able to make quicker and better-informed decisions about when to reorder products. Responsiveness on this level is essential for successful JIT inventory control.

2. Economic Order Quantity (EOQ)

EOQ is a formula (EOQ = √(2DS / H) that helps retailers determine the optimal order quantity for each product to minimize the total costs associated with:

    • Ordering
    • Holding
    • Stockouts
cost - quantity graph used for retail inventory stock control

The EOQ model can be a helpful starting point for optimizing your inventory control system. However, if you want to make the most of this inventory control method, integrate advanced analytics so you can level up with:

Dynamic data inputs

Traditional EOQ models may rely on static or average values for parameters such as demand rate, ordering cost, and holding cost; whereas AI-driven analytics accounts for fluctuations and trends in these parameters, providing dynamic data inputs for the EOQ formula–leading to a more adaptive and responsive inventory management system.

3. ABC Analysis

ABC analysis is a method of categorizing inventory items based on their importance to your business. Typically, “A” items are the most valuable, and account for a significant portion of your revenue, “B” items fall in the middle, and “C” items are the least valuable.

Taking the ABC Analysis method up a notch with AI-based analytics will give you improved results through :

Enhanced categorization

AI-driven analytics can consider multiple factors such as revenue, profit margin, sales velocity, and customer demand patterns to create more accurate and dynamic categorization.

Real-time adjustments

Unlike traditional ABC Analysis, which might be performed periodically, AI-driven analytics enables real-time updates to your inventory categories. So, as demand patterns or other factors change, your categorization can adjust accordingly, allowing you to respond more effectively to market fluctuations.

4. Perpetual Inventory System

A perpetual inventory system involves tracking and updating inventory records in real time as transactions occur,  typically through the use of technology such as barcode scanners and point-of-sale (POS) systems.

Now if you integrate this system with AI-driven analytics you’ll get:

Improved inventory performance tracking

AI-driven analytics can track and analyze various inventory performance metrics, such as stock turnover, gross margin return on investment (GMROI), and sell-through rates. This enables you to identify areas for improvement and make data-driven decisions to enhance your inventory management processes.

Real-time data analysis

The Perpetual Inventory method already allows for real-time inventory tracking, but AI-driven analytics takes it a step further by analyzing this data in real-time to identify:

    • Patterns
    • Trends
    • Potential issues

This enables you to respond quickly to changes in customer demand or market conditions and make data-driven decisions.

5. Periodic Inventory System

A periodic inventory system involves conducting scheduled inventory audits (e.g., monthly, quarterly, or annually) to verify stock levels and update inventory records. While this method may require less investment in technology and be easier to implement for some small retailers, it can also result in less accurate inventory records and a slower response to changes in customer demand.

Improvements with AI-driven analytics with this method are seen with:

Efficient inventory counts

AI-driven analytics lets you identify patterns and trends in your inventory data, such as products with frequent stock discrepancies or high demand variability. This information can guide you in prioritizing which items need more attention during inventory counts.

Optimized inventory audit frequency

AI-driven analytics can determine the optimal frequency for inventory counts based on factors such as:

    • Sales velocity
    • Demand variability
    • Stockout costs

This helps you plan inventory checks that keep a balance between having precise inventory information and the resources needed to count the items.

Inventory control methods for maximum efficiency

Inventory control is an essential process in managing stock and influences the success of running your retail business.

illustration of inventory control methods

By understanding the various inventory control methods and implementing the best one or combination of methods for your business, you can:

    • Engage better demand forecasting
    • Improve cash flow
    • Enhance customer satisfaction
    • Reduce stockouts and overstocking
    • Lower operating costs

No matter the retail inventory stock control method and/or combinations of methods you choose, you’ll find that using AI-driven analytics will increase efficiency and accuracy, leading to overall improvements for your business.

Take the time to invest in mastering inventory control and you’ll set your retail business up for long-term success and growth.

If you’re ready to elevate your inventory control retail business and learn more about how AI-driven analytics will help, contact our Team and ask for a Demo.

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