Inventory Control 101: Top Methods, Challenges, & Best Practices
I’ve lost count of the times I've feverishly searched my thrift shop’s warehouse for that perfect vintage dress a customer just bought. Or the frustration of realizing I’d overstocked on micro-trends like back-to-school blazers that no one wanted.
Think about the pressure of not being able to meet customer demand or the financial hemorrhage of excess stockpiling up in your warehouse.
These are the bitter fruits of poor inventory control.
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What if you could optimize your stock levels, streamline your operations—and as a result—make more money?
This is your ultimate guide to mastering inventory control.
We’ll talk about what exactly inventory control is, how other ecommerce brands track key inventory metrics, and best practices to improve your inventory control.
Let's roll.
What is Inventory Control?
An inventory control system manages a company's stock levels across all storage locations.
The main goal is to maintain optimal quantities to meet customer demand while minimizing costs from procurement through delivery.
Here’s what Leonardo DiCaprio has to say about inventory control:
Key elements of inventory control include:
- Real-time tracking: Keeping an eye on what you have and where it is at all times.
- Demand forecasting: Planning for future needs to avoid shortages or excess.
- Order management: Accurately handling purchases and deliveries.
- Data analysis: Making informed decisions based on real-time information.
Think of inventory control as your business’s engine room.
The purpose is to make sure the machine runs smoothly without hiccups or breakdowns by maintaining the just right amount of fuel.
In other words, it’s a balance between keeping enough SKUs to meet customer demand and avoiding dead weight from excess inventory.
Inventory Control Vs Inventory Management
The focus of inventory control is the tactical execution of maintaining stock levels, whereas the scope of inventory management is much broader.
If inventory control is an engine, then inventory management is the pilot.
This is the strategy behind the scenes, determining the optimal inventory balance to maximize efficiency and minimize costs, anticipating market fluctuations, and making adjustments as necessary.
Why is inventory control so essential for ecommerce brands?
For every $1 in sales, US manufacturers and retailers held $1.33 of inventory in July 2020, according to the US Census Bureau.
That's a lot of money tied up. Basically, you’re buying three items for every two that you sell.
A good inventory control system can drastically change this equation.
Robert Khachatryan, CEO and founder of Freight Right Global Logistics, says that
...effective inventory control is critical for maintaining operational efficiency and customer satisfaction.
Poor inventory management can lead to stockouts, overstocks, and missed sales opportunities, impacting both revenue and customer loyalty.
Let’s see how:
- Better quality control. Monitor every item, from its arrival to its sale. Get a sense of what's selling, what's not, and why. Don't let stockouts or overstocks cost you money.
- Enhanced organizational efficiency and profitability. Keeping your warehouse organized is key to efficiency. Inventory control allows you to optimize storage space, streamline picking and packing, and reduce the risk of stockouts or overstocks. You'll maximize sales and minimize waste to boost your profitability.
- Improved financial accuracy and compliance. Accurate inventory records are crucial to your ecommerce brand’s financial health. Audits, tax filings, and financial statements all rely on them. You can make informed decisions, keep your inventory accurate, and ensure compliance by keeping precise inventory data.
A healthy business, therefore, depends on optimizing inventory control.
5 Common Types Of Inventory Control Systems
A modern supply chain's digital backbone is its inventory control system. The tool tracks and manages products from the moment they're purchased to the moment they reach customers.
These systems automate tasks like ordering, receiving, storing, and shipping, saving time and resources.
They also provide real-time insight into stock levels, helping businesses avoid stockouts and overstocks as well as optimize inventory turnover.
Broadly speaking, ecommerce businesses most often use these five types of inventory control systems:
1. Just-in-time (JIT) inventory control system
A JIT system is all about having the right items on hand—at the right time—in the right quantity.
In the JIT model, businesses receive goods from suppliers exactly as they’re needed for production or sale, so they don’t have to store excess inventory or waste raw materials in the process.
I spoke with Kate, part of the marketing team at Irresistible Me—an ecommerce beauty company specializing in hair extensions and wigs.
We keep less stock on hand and order based on demand.
For example, we cut our holding costs by 15% last year just by paying close attention to sales trends and adjusting our orders.
Pros:
- Reduces inventory holding costs.
- Improves cash flow dramatically.
Cons:
- Destabilized by customer demand shifts.
- Vulnerable to any supply chain disruptions and natural disasters.
2. Periodic inventory control system
Imagine pausing a movie to count all the characters on screen.
The periodic inventory system takes stock of your goods at fixed intervals, such as monthly or quarterly.
While simple, it's often too slow for fast-moving businesses.
This system may be more suitable for small businesses, seasonal businesses, or companies selling big-ticket items.
Pros:
- Simple way to manage small inventories, especially when you're starting out.
- You don't need any fancy technology.
Cons:
- In larger businesses, this is time-consuming.
- There's a high chance of human error in counting
3. Perpetual inventory control system
A perpetual inventory system gives you a constant, up-to-the-minute overview of your stock levels.
A barcode or radio frequency identification (RFID) tag can track every item entering or leaving your warehouse automatically.
For making informed decisions, this real-time data is gold—especially for ecommerce brands.
Businesses of all sizes can benefit from perpetual inventory systems, but those with large or rapidly changing stock levels often find them most useful.
Think grocery stores and pharmacies that have perishable stock that’s prone to spoilage.
Pros:
- Getting accurate, real-time data.
- Reducing manual counting.
- Making better decisions.
Cons:
- May be complicated to install and expensive to maintain.
- Can be vulnerable to theft.
4. ABC analysis inventory control system
The ABC analysis divides your stock into A, B, and C items based on the value of each item.
You pay close attention to your As, keep an eye on the Bs, and don't sweat the Cs too much.
Let’s hear from Robert of Freight Right Global Logistics again:
Categorizing inventory based on value and turnover allows us to prioritize management efforts on the most critical items.
For example, focusing on the top 20% of SKUs that drive 80% of revenue ensures that key products are always available.
Pros:
- Optimizes inventory management by prioritizing items based on value, allowing efficient resource allocation, cost reduction, and improved inventory control.
- This increases profitability, adaptability, and ultimately, improved customer satisfaction.
Cons:
- Although ABC analysis is simple in concept, it can be complex in practice. You need to juggle subjectivity, neglect of C items, and overemphasis or underestimation.
5. Economic order quantity (EOQ) inventory control system
The Wilson Method, or EOQ, is like filling a gas tank.
You want enough fuel to get you to your destination (meet demand), but not too much that it wastes resources (excess stock), and kills profits.
EOQ helps you find the sweet spot between ordering too much and too little, whether you manufacture, sell, or use products internally.
Pros:
- A simple yet effective inventory control method to find the right order size to minimize inventory costs.
Cons:
- This model has trouble accounting for real-world complexities such as fluctuating demand, changing costs, and unpredictable lead times.
- Inventory levels can be suboptimal and order quantities can sometimes be inaccurate.
Key Metrics To Track For Inventory Control
Key performance indicators (KPIs) for inventory control are your business's X-ray. They reveal what's going on inside, and highlight areas where you need to work harder.
But if this is your first go at monitoring inventory control, how do you know which KPIs to track?
I evaluated responses from the 17 ecommerce leaders I spoke with, and here are the most frequently tracked KPIs for optimizing inventory control:
Inventory turnover ratio
A business's inventory turnover ratio measures how quickly its inventory is sold and replaced.
How it’s calculated: A basic calculation is to divide the cost of goods (COGS) sold by the average inventory:
Cost of Goods Sold COGS / Average Inventory Cost = Inventory Turnover
Real-life example: Tracking hemp turnover
Dennis Sanders, founder and CEO of the popular ecommerce site, Burning Daily, tracks their business’s turnover rate, sell-through rate, and days of supply.
He says:
Our turnover rate for popular items like Delta-8 gummies often exceeds 12 times per year, while our sell-through rate for limited edition drops can hit 90% within 48 hours of launch.
A high inventory turnover is generally indicative of efficient inventory management, but this can vary depending on the industry and the product type.
Carrying costs
Inventory carrying costs are the hidden expenses of holding stock.
These include:
- Capital costs: The money tied up in your inventory.
- Storage costs: Think warehousing, utilities, and labor.
- Risk costs: This includes product damage, theft, and obsolescence.
- Security costs: The cost of warehouse staffing, equipment maintenance, security systems, and IT infrastructure.
How it’s calculated: The total inventory holding cost is the sum of all four components of carrying cost.
And this is the formula:
Carrying Cost (%) = Inventory Holding Sum / Total Value of Inventory x 100
The key to minimizing these costs? Effective inventory control.
Stockout frequency rate
The stockout rate measures how often products are out of stock. This is the percentage of how many customer demands aren't met due to stock shortages.
How’s it calculated:
(Number of Stockouts / Total Number of Stockout Opportunities) x 100
According to a study in the Harvard Business Review in 2004, a typical stockout rate is around 8%.
And more recent studies, despite advances in supply chain management and technology, indicate that global stockout rates remain stubbornly at around the same percentage.
Real-life example: Automated reorder alerts for pet products
Rongzhong Li, founder, and CEO of Petoi, a programmable bionic robot pet shop, says:
To prevent stockouts, I implemented automated reorder alerts tied to inventory levels, reducing stockouts by 30% and improving overall fulfillment efficiency.
Other KPIs
An optimal inventory control process can also include other KPIs such as:
- Days of inventory on hand
- Accuracy of inventory counts
- Order cycle time
- Perfect order rate
- Client engagement rates
Top Inventory Control Methods
The best inventory tracking method depends on your business’s specific products and accounting requirements.
That said, here are some of the most popular ones:
FIFO (first in, first out)
A FIFO inventory control method assumes that the oldest products will be sold first. In this method, the remaining stock is valued based on the cost of the earliest inventory.
The FIFO method simulates real-world inventory movement, simplifying bookkeeping and reducing the risk of errors.
LIFO (last in, first out)
In LIFO, the most recently acquired inventory is sold first. The cost of old purchases is used to value the remaining stock.
When inflation is high, LIFO is often adopted as a tax benefit, since it usually lowers your taxable income.
Beware though—this inventory control method may not reflect actual goods flow and could complicate financial analysis.
Cycle counts
A cycle count is a more efficient alternative to a physical inventory count.
Hear me out.
Basically, instead of counting everything at once, you count small portions of your inventory items on a regular basis. In addition to improving accuracy, this approach reduces disruptions and gives you real-time inventory visibility.
A cycle counting system ensures inventory accuracy by regularly checking and adjusting stock levels.
For detecting discrepancies, it uses sales data, reorder points, and real-time inventory management system updates.
Batch tracking
The batch tracking process, also called lot tracking, is an inventory control method that uses batch numbers to track products, parts, or ingredients throughout the entire supply chain—from manufacturers to fulfillment centers—to the final customers.
The system allows you to track your inventory from raw materials to finished products.
There's a lot of information here—like where your inventory came from, where it was sent, how much was shipped, and even when it'll expire.
The process reduces waste and boosts profits by identifying problem sources, recalling defective items, and managing inventory according to expiration dates.
Vendor-managed inventory (VMI)
A vendor-managed inventory (VMI) shifts inventory management responsibilities from the retailer to the supplier.
How does this work?
It's the supplier's job to keep an eye on stock levels, forecast demand, and optimize replenishment of your inventory.
The VMI system is perfect for ecommerce retailers that manage a diverse product range from multiple suppliers.
Example: VMI helps many businesses optimize their supply chains, from retail giants like Walmart to ecommerce sites like Amazon.
5 Tips For Improving Your Inventory Control Techniques
In order to meet customer demand and optimize costs, you've got to manage your inventory smartly.
Here are five practical tips to improve your inventory control strategies:
1. Use safety stock strategically
Retailers in the United States lost an astounding $82 billion from out-of-stocks in 2021.
Paradoxically enough, a bare shelf actually costs a lot of money.
Think of safety stock as your ecommerce brand’s insurance policy. This extra layer of protection helps you deal with demand spikes, supplier delays, and unforeseen supply chain disruptions.
By carefully analyzing:
- Demand patterns,
- Lead time variability; and
- Desired service levels
…you can optimize your safety stock levels. To do this, you need to balance the risks of stockouts against the costs of overstocking.
2. Implement an ABC analysis system
Sergey Taver, marketing manager at Precision Watches, explains how employing an ABC analysis has helped them prioritize inventory management.
By categorizing items based on their value and turnover rates, we focus more on high-impact products, ensuring they are always available.
For example, our luxury watches (Category A) get more attention in stock management compared to accessory items (Category C).
An ABC analysis determines the optimal allocation of resources for your ecommerce inventory.
3. Take advantage of advanced technology
Research suggests that 70% of spreadsheets contain errors.
And when you factor in this very high percentage and apply it to financial accounts, you can lose millions.
Real-life story: A life-changing refund error
A Bulgarian employee at Crypto.com made a teeny tiny mistake in a spreadsheet, leading to an Australian customer receiving a $10.5 million refund instead of $100.
The company discovered the error seven months later. But alas—it was too little, too late.
The customer and her partner had bought homes, cars, and furniture; and even managed to set aside a cool $4 million for an offshore account in Malaysia.
So, if you’re still using spreadsheets for stock control—it’s time to take stock of what that might be costing you.
Just one typo, and suddenly you've funded someone's dream vacation(s). Or you’re in court fighting to get your money back.
What’s the alternative?
Here are a few key technologies to improve inventory control for your ecommerce business:
- A barcode system tracks products from the moment they enter your warehouse until they get to your customers using scanners. This digital labeling helps you keep the right inventory on hand, prevent losses, and streamline warehouse management.
- RFID tags are like supercharged barcodes. They allow real-time visibility of inventory without requiring a direct line of sight. The speed and accuracy can cut labor costs drastically, especially in warehouses.
- The right inventory control software is the command center of your supply chain. You'll get real-time data for smarter business decisions, simplified operations, and improved inventory accuracy.
Let’s hear from an expert.
Karen Chen is the manager at Journaling Supplies—a China-based ecommerce site providing high-quality, thoughtfully curated journaling products and supplies.
They use Quickbooks Commerce for inventory accounting.
The software provides real-time inventory tracking, automated reorder points, and comprehensive reporting, which have been instrumental in streamlining our inventory management processes.
Since implementing the inventory control software, we've seen a 25% improvement in our order fulfillment rate and a significant reduction in stock discrepancies.
But, different boats for different folks.
So, if you can’t decide on the right inventory management software for your ecommerce business, we’ve compiled a list of our top 10 picks:
4. Conduct regular inventory audits
You need to audit your inventory regularly to make sure your recorded stock matches what's actually in your warehouse.
This inventory control method compares the physical count of items on shelves to the numbers on paper.
How does this help your business?
Case study: Cycle counting CBD stock
I reached out to Daanish Matheen, founder of Cure By Design—a holistic wellness brand that’s “on a mission to destigmatize hemp and CBD” in the Indian market and beyond. They have successful operations both online and offline.
They also serve vets and clinics—which means their inventory control system must meet customer demand, maintain a reliable supply chain, and build trust with both customers and suppliers.
For his business, Daanish tells me:
We've found success with a manual inventory management approach, relying on regular stock checks and physical counts.
Our operations team conducts monthly and quarterly stock checks, ensuring inventory accuracy and identifying discrepancies.
5. Manage your finished goods inventory
Does your ecommerce business sell physical products? If yes, you need to manage your finished goods inventory.
Whether it's a jar of jam, a new book, or a smartphone—these items have made it through the manufacturing process.
Interestingly, a finished product for one business could be the raw material for another.
For example, steel is a finished product for a steel mill, but it's the starting point for a car manufacturer.
A precise calculation of the value of finished products can optimize stock levels and prevent stockouts, ultimately contributing to greater profitability.
Common Inventory Control Problems—And Solutions
I talked to ecommerce business owners to find out what exactly disrupts their operations, and whether they have solutions for others who face similar problems.
Spoiler alert: they do.
Read on.
Poor demand forecasting
Reyansh Mestry, head of marketing at TopSource Worldwide, notes that common pitfalls of inventory control include overstocking, understocking, and lack of real-time data.
When you overstock, you run the risk of ending up with dead stock, which bloats your overall inventory carrying costs.
The solution:
To avoid these, I recommend regularly auditing your inventory and using data analytics to predict demand accurately.
A client who used predictive analytics saw a 25% improvement in forecast accuracy, minimizing both stockouts and overstock.
Outdated inventory control systems and data
Head of Organic Growth at Wrike, Elisa Montanari, says:
One of the biggest issues is outdated tracking systems and inaccurate data.
If you’re not reliably tracking inventory, it becomes impossible to have the right products available at the right times.
While you’ll always be dealing with the unknown and trying to forecast demand to manage future supply, you need real-time visibility on stock levels and automated systems that reduce delays and manage stock efficiently.
The solution: A powerful inventory control software that tracks the amount of inventory, provides up-to-second data on your stock levels, and therefore, greatly improves your demand forecasting.
Multiple warehouse management
Eric Gantz, co-founder of Verena Street Coffee, juggles sales across their online store, Amazon, and over 800 brick-and-mortar partners.
The problem with multiple warehouses is that tracking, managing, and coordinating stock across different locations complicates inventory control, leading to increased costs and complex operations.
The solution: Surprise, surprise. It’s inventory control software.
Veeqo is our essential tool for managing inventory across our two main sales channels—our Shopify online store and Amazon.
It centralizes all our sales channel data in one place.
This means we can easily identify our top-selling products across all our online sale platforms, allowing us to make informed decisions about what to stock and where.
Stockouts, overstocking, and lack of real-time inventory tracking
Gregory Shein, owner of CORCAVA, says overstocking, understocking, and lack of real-time tracking lead to poor inventory control.
An overstocked warehouse wastes space and capital, while an understocked one loses sales.
And they're both exacerbated by inaccurate, delayed inventory data, which makes it hard to make informed decisions.
The solution:
I advise ecommerce brands to implement robust forecasting methods and real-time inventory management systems to avoid these issues.
We use Zoho Inventory for inventory control.
Its real-time tracking, automated reorder points, and comprehensive reporting have significantly streamlined our operations.
Final Thoughts
A deeper issue in inventory control drives the challenges outlined at the beginning: the frantic search for stock, the overstocking of once-trendy items, and the constant fight against stockouts.
However, there's a vein of quartz running through all the methods, metrics, and best practices we've discussed for inventory control: data-driven, real-time inventory management.
The good news is that you can turn your inventory from a financial burden into a lever for business optimization with the right inventory control software.
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