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Guide

Stock control and inventory

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Stock control, otherwise known as inventory control, is used to show how much stock you have at any one time, and how you keep track of it.

It applies to every item you use to produce a product or service, from raw materials to finished goods. It covers stock at every stage of the production process, from purchase and delivery to using and re-ordering the stock.

Efficient stock control allows you to have the right amount of stock in the right place at the right time. It ensures that capital is not tied up unnecessarily, and protects production if problems arise with the supply chain.

This guide explains different stock control methods, shows you how to set one up and tells you where to find more information.

Types of stock

Everything you use to make your products, provide your services and to run your business is part of your stock.

There are four main types of stock:

  • raw materials and components - ready to use in production
  • work in progress - stocks of unfinished goods in production
  • finished goods ready for sale
  • consumables - for example, fuel and stationery

The type of stock can influence how much you should keep - see the page in this guide on how much stock you should keep.

Stock value

You can categorise stock further, according to its value. For example, you could put items into low, medium and high value categories. If your stock levels are limited by capital, this will help you to plan expenditure on new and replacement stock.

You may choose to concentrate resources on the areas of greatest value.

However, low-cost items can be crucial to your production process and should not be overlooked.

How much stock should you keep?

Deciding how much stock to keep depends on the size and nature of your business, and the type of stock involved. If you are short of space, you may be able to buy stock in bulk and then pay a fee to your supplier to store it, calling it off as and when needed.

Keeping little or no stock and negotiating with suppliers to deliver stock as you need it

Advantages Disadvantages
Efficient and flexible - you only have what you need, when you need it Meeting stock needs can become complicated and expensive
Lower storage costs You might run out of stock if there's a hitch in the system
You can keep up to date and develop new products without wasting stock You are dependent on the efficiency of your suppliers

This might suit your business if it's in a fast-moving environment where products develop rapidly, the stock is expensive to buy and store, the items are perishable or replenishing stock is quick and easy.

Keeping lots of stock

Advantages Disadvantages
Easy to manage Higher storage and insurance costs
Low management costs Certain goods might perish
You never run out Stock may become obsolete before it is used
Buying in bulk may be cheaper Your capital is tied up

This might suit your business if sales are difficult to predict (and it is hard to pin down how much stock you need and when), you can store plenty of stock cheaply, the components or materials you buy are unlikely to go through rapid developments or they take a long time to re-order.

Stock levels depending on type of stock

There are four main types of stock:

Raw materials and components

Ask yourself some key questions to help decide how much stock you should keep:

  • How reliable is the supply and are alternative sources available?
  • Are the components produced or delivered in batches?
  • Can you predict demand?
  • Is the price steady?
  • Are there discounts if you buy in bulk?

Work in progress - stocks of unfinished goods

Keeping stocks of unfinished goods can be a useful way to protect production if there are problems down the line with other supplies.

Finished goods ready for sale

You might keep stocks of finished goods when:

  • demand is certain
  • goods are produced in batches
  • you are completing a large order

Consumables

For example, fuel and stationery. How much stock you keep will depend on factors such as:

  • reliability of supply
  • expectations of price rises
  • how steady demand is
  • discounts for buying in bulk

Stock control methods

There are several methods for controlling stock, all designed to provide an efficient system for deciding what, when and how much to order.

You may opt for one method or a mixture of two or more if you have various types of stock. For further information, see the page in this guide on types of stock.

  • Minimum stock level - you identify a minimum stock level, and re-order when stock reaches that level. This is known as the Re-order Level.
  • Stock review - you have regular reviews of stock. At every review you place an order to return stocks to a predetermined level.

Just In Time (JIT) - this aims to reduce costs by cutting stock to a minimum. Items are delivered when they are needed and used immediately. There is a risk of running out of stock, so you need to be confident that your suppliers can deliver on demand.

These methods can be used alongside other processes to refine the stock control system. For example:

Re-order lead time - allows for the time between placing an order and receiving it.

Economic Order Quantity (EOQ) - a standard formula used to arrive at a balance between holding too much or too little stock. It's quite a complex calculation, so you may find it easier to use stock control software.

Batch control - managing the production of goods in batches. You need to make sure that you have the right number of components to cover your needs until the next batch.

If your needs are predictable, you may order a fixed quantity of stock every time you place an order, or order at a fixed interval - say every week or month. In effect, you're placing a standing order, so you need to keep the quantities and prices under review.

First in, first out - a system to ensure that perishable stock is used efficiently so that it doesn't deteriorate. Stock is identified by date received and moves on through each stage of production in strict order.

Stock control systems - keeping track manually

Stocktaking involves making an inventory, or list, of stock, and noting its location and value. It's often an annual exercise - a kind of audit to work out the value of the stock as part of the accounting process.

Codes, including barcodes, can make the whole process much easier but it can still be quite time-consuming. Checking stock more frequently - a rolling inventory - avoids a massive annual exercise, but demands constant attention throughout the year. Radio Frequency Identification (RFID) tagging using handheld readers can offer a simple and efficient way to maintain a continuous check on inventory. See the page in this guide on using RFID for inventory control, stock security and quality management.

Any stock control system must enable you to:

  • track stock levels
  • make orders
  • issue stock

The simplest manual system is the stock book, which suits small businesses with few stock items. It enables you to keep a log of stock received and stock issued.

It can be used alongside a simple re-order system. For example, the two-bin system works by having two containers of stock items. When one is empty, it's time to start using the second bin and order more stock to fill up the empty one.

Stock cards are used for more complex systems. Each type of stock has an associated card, with information such as:

  • description
  • value
  • location
  • re-order levels, quantities and lead times (if this method is used)
  • supplier details
  • information about past stock history

More sophisticated manual systems incorporate coding to classify items. Codes might indicate the value of the stock, its location and which batch it is from, which is useful for quality control.

Stock control systems - keeping track using computer software

Computerised stock control systems run on similar principles to manual ones, but are more flexible and information is easier to retrieve. You can quickly get a stock valuation or find out how well a particular item of stock is moving.

A computerised system is a good option for businesses dealing with many different types of stock. Other useful features include:

  • Stock and pricing data integrating with accounting and invoicing systems. All the systems draw on the same set of data, so you only have to input the data once. Sales Order Processing and Purchase Order Processing can be integrated in the system so that stock balances and statistics are automatically updated as orders are processed.
  • Automatic stock monitoring, triggering orders when the re-order level is reached.
  • Automatic batch control if you produce goods in batches.
  • Identifying the cheapest and fastest suppliers.
  • Bar coding systems which speed up processing and recording. The software will print and read bar codes from your computer.
  • Radio Frequency Identification (RFID) which enables individual products or components to be tracked throughout the supply chain. See the page in this guide on using RFID for inventory control, stock security and quality management.

The system will only be as good as the data put into it. Run a thorough inventory before it goes "live" to ensure accurate figures. It's a good idea to run the previous system alongside the new one for a while, giving you a back-up and enabling you to check the new system and sort out any problems.

Choose a system

There are many software systems available. Talk to others in your line of business about the software they use, or contact your trade association for advice.

Make a checklist of your requirements. For example, your needs might include:

  • multiple prices for items
  • prices in different currencies
  • automatic updating, selecting groups of items to update, single-item updating
  • using more than one warehouse
  • ability to adapt to your changing needs
  • quality control and batch tracking
  • integration with other packages
  • multiple users at the same time

Avoid choosing software that's too complicated for your needs as it will be a waste of time and money.

Using RFID for inventory control, stock security and quality management

Radio Frequency Identification (RFID) allows a business to identify individual products and components, and to track them throughout the supply chain from production to point-of-sale.

An RFID tag is a tiny microchip, plus a small aerial, which can contain a range of digital information about the particular item. Tags are encapsulated in plastic, paper or similar material, and fixed to the product or its packaging, to a pallet or container, or even to a van or delivery truck.

The tag is interrogated by an RFID reader which transmits and receives radio signals to and from the tag. Readers can range in size from a hand-held device to a "portal" through which several tagged devices can be passed at once, e.g. on a pallet. The information that the reader collects is collated and processed using special computer software. Readers can be placed at different positions within a factory or warehouse to show when goods are moved, providing continuous inventory control.

Using RFID tagging for stock control offers several advantages over other methods such as barcodes:

  • tags can be read remotely, often at a distance of several metres
  • several tags can be read at once, enabling an entire pallet-load of products to be checked simultaneously
  • tags can be given unique identification codes, so that individual products can be tracked
  • certain types of tag can be overwritten, enabling information about items to be updated, e.g. when they are moved from one part of a factory to another

RFID tagging can be used:

  • to prevent over-stocking or under-stocking a product or component
  • for stock security, by positioning tag-readers at points of high risk, such as exits, and causing them to trigger alarms
  • for quality control, particularly if you make or stock items with a limited shelf life

The costs associated with RFID tagging have fallen over recent years, and continue to do so, to bring the process within the reach of more and more businesses. The benefits of more efficient stock control and improved security make it particularly attractive to retailers, wholesalers or distributors who stock a wide range of items, and to manufacturers who produce volume runs of products for different customers.

Stock security

Keeping stock secure depends on knowing what you have, where it is located and how much it is worth - so good records are essential. Stock that is portable, does not feature the business' logo, or is easy to sell on, is at particular risk.

Thieves and shoplifters

A thief coming in from outside is an obvious threat. Check the security around your premises to keep the risk to a minimum. In a store, thieves may steal in groups - some providing a distraction while others take goods. Teach your staff to be alert and to recognise behaviour like this. Set up a clear policy and make sure staff are trained in dealing with thieves.

Offering to help a customer if you are suspicious will often prevent a theft. Avoid using confrontational words like "steal" if you do have to approach a suspected thief, and avoid getting into a dangerous situation.

Protect your stock

  • Identify and mark expensive portable equipment (such as computers). If possible, fit valuable stock with security tags - such as Radio Frequency Identification tags - which will sound an alarm if they are moved.
  • Don't leave equipment hanging around after delivery. Put it away in a secure place, record it and clear up packaging. It is a good idea to dispose of packaging securely -leaving boxes in view could be an advertisement to thieves.
  • Take regular inventories.
  • Put CCTV in parking lots and other key locations.

Theft by staff

Theft by employees can sometimes be a problem. To prevent this:

  • Train staff about your security systems and your disciplinary policies and procedures. Training about the cost of stock theft will help, as many people aren't aware of the implications for company turnover and job security.
  • Set up procedures to prevent theft. Staff with financial responsibilities should not be in charge of stock records.
  • Restrict access to warehouses, stockrooms and stationery cupboards.
  • Regularly change staff controlling stock to avoid collusion or bad practice.

Control the quality of your stock

Quality control is a vital aspect of stock control - especially as it may affect the safety of customers or the quality of the finished product.

Efficient stock control should incorporate stock tracking and batch tracking. This means being able to trace a particular item backwards or forwards from source to finished product, and identifying the other items in the batch.

Goods should be checked systematically for quality, faults identified and the affected batch weeded out. This will allow you to raise any problems with your supplier and at the same time demonstrate the safety and quality of your product.

With a good computerised stock control system, this kind of tracking is relatively straightforward. Manual stock control methods can also use codes to systematise tracking and make it easier to trace particular batches.

Radio Frequency Identification (RFID) can be used to store information about a product or component's manufacturing date, to ensure that it is sold or processed in time. The system can also be used to trace faulty products quickly and efficiently. See the page in this guide on using RFID for inventory control, stock security and quality management.

Stock control administration

There are many administrative tasks associated with stock control. Depending on the size and complexity of your business, they may be done as part of an administrator's duties, or by a dedicated stock controller.

For security reasons, it's good practice to have different staff responsible for finance and stock.

Typical paperwork to be processed includes:

  • delivery and supplier notes for incoming goods
  • purchase orders, receipts and credit notes
  • returns notes
  • requisitions and issue notes for outgoing goods

Stock can tie up a large slice of your business capital, so accurate information about stock levels and values is essential for your company's accounting.

Figures should be checked systematically, either through a regular audit of stock -stocktaking - or an ongoing program of checking stock - rolling inventory.

If the figures don't add up, you need to investigate as there could be stock security problems or a failure in the system.

Health and safety

Health and safety aspects of stock control are related to the nature of the stock itself. Issues such as where and how items are stored, how they are moved and who moves them might be significant - depending on what they are.

You might have hazardous materials on your premises, goods that deteriorate with time or items that are very heavy or awkward to move.


Original document, Stock control and inventory, © Crown copyright 2009
Source: Business Link UK (now GOV.UK/Business)
Adapted for Québec by Info entrepreneurs


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