Effective inventory control is at the heart of operational excellence. For businesses to thrive in competitive markets, they must maintain the perfect balance of supply and demand. Excess stock ties up capital and increases storage costs. Shortages can result in lost sales and dissatisfied customers. The right inventory control methods can dramatically improve accuracy, reduce overhead, and streamline operations.
ABC Analysis: One Product Ranking Is Not Enough
Most organizations have identified “A” items. That is, those products that are most important to have available for immediate delivery to customers. But how do companies identify “A” items? The most common method is to consider the total cost of goods sold recorded over the past 12 months. That is, those items with the most dollars flowing through inventory are considered “A” items. A typical ranking strategy identifies “A” items as those responsible for the top 80% of cost of goods sold, “B” items as those responsible for the next 15% of cost of goods sold, and “C” items responsible for the last 5% of cost of goods sold.
But is the cost of goods sold the best way to classify your critical or most important products? You might stock a relatively inexpensive item that is frequently requested. While the annual cost of goods sold is relatively low, customers order it several times a week. Isn’t it important to be sure that this item is always available?
The best practice is to rank or classify products based on three separate criteria:
- Cost of goods sold
- Frequency of sale or use (i.e., how often the product is requested)
- Profitability (i.e., annual gross profit dollars)
Three-way ranking can maximize the productivity and profitability of your investment in stock inventory. You might have a product that is “A” ranked based on the cost of goods sold. “A” is ranked based on frequency of request, but “C” is ranked based on gross profit dollars. While this “AAC” ranked product gets high marks for two of the criteria, it presents a possible problem. The high cost of goods sold indicates that there is a lot of money tied up in inventory. The high frequency rank shows that customers are frequently requesting the product. The problem involves the profitability rank of “C.” The frequent sales aren’t resulting in a lot of profit dollars. Could your sale prices be so low that you are losing money on every transaction?
On the other hand, consider a product that is “C” ranked based on cost of goods sold, “A” ranked based on frequency of request, and “A” ranked based on profitability. The low cost of goods sold indicates that you have few dollars invested in inventory. However, customers frequently request the item, and you are making a lot of money on those sales (i.e., “A” ranked for both frequency and profitability). This is a product that you probably always want to have in stock.
Cycle Counting vs. Full Physical Inventories
Traditional inventory control relies on full physical counts, usually conducted annually. While this can validate inventory records, it’s time-consuming, costly, and disruptive. In contrast, cycle counting is the process of continually counting your inventory. It usually results in more accurate on-hand quantities. It breaks down the counting process into smaller, manageable segments, conducted regularly throughout the year. This method improves accuracy, helps identify errors early, and maintains operational continuity.
Designing a Reliable Counting Schedule
To implement an effective cycle counting program, businesses must develop a strategy for frequency and prioritization. An effective cycle counting program will be based on an activity ranking, with very expensive products considered “honorary” A items. For example:
- A ranked items (the most important) are counted more frequently, perhaps monthly or quarterly.
- B-class items might be counted biannually.
- C-class items can be counted annually or as needed.
Best practices for successful cycle counting include:
- Deciding whether to show the person counting the quantity they should find. Showing the counter, the current on-hand quantity will limit reported discrepancies as they will immediately look in the area for missing material. This minimizes the time needed to cycle count.
- Assigning trained and trusted personnel to ensure consistency. This is critical if you are showing them the quantity they should find in inventory and not utilizing “blind” counts.
- Immediately investigating and resolving discrepancies.
Benefits of Cycle Counting:
- Continuous inventory accuracy
- Reduced disruption to operations
- Early identification of process issues or shrinkage
By contrast, full physical inventories may still be useful in specific scenarios:
- When you feel that there are significant discrepancies in on-hand quantities of products throughout your warehouse
- After significant warehouse changes
- For year-end financial reporting in certain industries
However, full physical counts should be used sparingly and supplemented with ongoing cycle counting to sustain accuracy without halting operations.
Just-In-Time (JIT) and Kanban Systems
While distributors and retailers usually have to stock a wide range of fast-moving and slow-moving products, Just-In-Time (JIT) and Kanban systems have the potential to improve inventory-related operations for many manufacturers. These methods reduce waste, lower storage costs, and align inventory with actual demand.
Just-In-Time aims to receive goods only when needed, minimizing inventory levels. This method requires a high degree of coordination between suppliers, operations, and demand forecasting.
Kanban, originally developed in Toyota’s manufacturing system, is a visual signaling system that controls the flow of materials based on actual consumption rather than forecasted demand.
Integrating JIT with Demand Forecasting
JIT is not a standalone method; its success depends on reliable demand forecasting and supplier performance. Forecasting must factor in:
- Historical demand patterns
- Seasonal fluctuations
- Market trends
- Promotional activity
JIT works best in stable environments where demand is predictable, and lead times are short.
To complement JIT, Kanban systems use signals (cards, bins, or digital indicators) to trigger replenishment only when items are consumed. Kanban is especially useful in:
- Manufacturing environments
- Assembly lines
Benefits of JIT and Kanban:
- Reduced inventory carrying costs
- Minimized waste and overproduction
- Enhanced operational agility
Challenges to watch out for:
- Vulnerability to supply chain disruptions
- High dependency on accurate data and supplier reliability
Aligning Methods with Business Goals
No single inventory control method fits every business. The key to success is aligning the right technique with your operational goals, industry characteristics, and resource availability.
For example:
- A wholesale distributor might rely heavily on ABC analysis and cycle counting to control a wide range of SKUs.
- A high-tech manufacturer could benefit from JIT and Kanban to minimize component storage and align production with customer orders.
- A retail business may use a hybrid model, combining ABC classification with periodic physical counts during peak seasons.
Technology as an Enabler
Inventory control methods are most effective when supported by modern technology. Key enablers include:
- Inventory management systems (IMS): Automate reordering, track stock levels, and generate reports.
- Barcode and RFID scanning: Improve accuracy and reduce manual entry.
- Enterprise Resource Planning (ERP): Integrate inventory with purchasing, production, and sales.
- IoT sensors and real-time analytics: Provide visibility across the supply chain and enable proactive decisions.
Performance Improvements from Proven Methods
Companies that adopt structured inventory control methods consistently achieve measurable gains:
- Accuracy rates rise to 95% or higher with effective cycle counting and ABC analysis.
- Carrying costs decline through lean practices such as JIT and “best practice forecasting of future demand of products.
- Customer service levels improve thanks to better product availability.
- Labor productivity increases as time is spent on high-value tasks rather than blanket inventory counts.
Real-world success stories abound, from manufacturers streamlining workflows to retailers and distributors reducing overstocks. The common thread is a commitment to consistent, methodical inventory management and control.
Final Thoughts
Inventory control and management methods like ABC classification, cycle counting, Just-In-Time, and Kanban have been tested and refined over decades. They are not one-size-fits-all solutions but strategic tools that, when applied correctly, can transform operations.
As businesses strive for agility, efficiency, and responsiveness, the ability to manage inventory with precision becomes a competitive advantage. Let EIM help you by assessing your current inventory processes, identifying gaps, and piloting a method that aligns with your goals.
Partner with Effective Inventory Management (EIM)
If you’re ready to elevate your inventory control strategies and drive operational excellence, look no further than Effective Inventory Management (EIM). With decades of expertise, EIM provides best-in-class inventory management consulting tailored to your unique business needs.
Whether you’re implementing ABC analysis, rolling out a cycle counting program, integrating JIT with your supply chain, or you don’t know where to start, EIM helps you do it right the first time. Our proven methodologies, analytical tools, and personalized support ensure sustainable improvements in accuracy, efficiency, and profitability.
Discover how EIM can help your organization maximize the productivity and profitability of your investment in stock inventory. Contact us to get started.