Inventory Control:
Procedures, Software, Best Practices

How We Got Here: The History of Inventory Control

Inventory management isn’t a modern headache - it’s a centuries-old battle. Early civilizations had their own methods of tracking stock, from tally sticks in ancient Mesopotamia to Roman warehouses that stored grain for armies on the march. During the Industrial Revolution, businesses suddenly had more inventory than ever, fueling the need for better systems.

Then came the Just-in-Time (JIT) revolution, a philosophy popularized by Toyota in the 1970s. Instead of stockpiling parts, they ordered only what was needed, exactly when it was needed, reducing waste and maximizing efficiency. It worked - until it didn’t.

When supply chains faltered (think: COVID-19, global shipping crisis, and semiconductor shortages), companies were left scrambling, proving that inventory control is a delicate balance, not a one-size-fits-all formula.

But Wait, What Do You Mean by Inventory Control?

Inventory control is the process of managing and overseeing the flow of goods, materials, and products that a business has in stock. It’s a complex system of inventory tracking and maintaining optimal inventory levels to ensure that a company has enough products to meet customer demand without overstocking or understocking.

Key aspects of inventory control include:

• Tracking the quantity, location, and status of all items in inventory
• Determining optimal inventory levels, reorder points, and safety stock
• Monitoring inventory turnover and identifying slow-moving items
• Implementing systems to prevent loss through theft, damage, or obsolescence
• Forecasting future inventory needs based on sales trends and seasonal factors

Effective inventory control helps businesses reduce carrying costs, prevent stockouts, improve cash flow, and enhance customer satisfaction by ensuring products are available when needed. That’s why inventory control is impossible without inventory management software, barcode systems, and established procedures for receiving, storing, and distributing inventory items throughout the supply chain.

What Are the 4 Types of Inventory?

The four primary types of inventory are:

Raw Materials: These are the basic inputs that companies purchase from suppliers to use in manufacturing processes. Raw materials haven’t yet undergone any transformation or processing by the company. Examples include steel for a car manufacturer, fabric for a clothing company, or ingredients for a food processor.

Work-in-Progress (WIP): This inventory consists of partially completed products that are still in the production process. These items have undergone some processing but aren’t yet finished goods ready for sale. WIP inventory includes the value of raw materials used, direct labor applied, and manufacturing overhead allocated to these partially completed products.

Finished Goods: These are completed products ready for sale to customers. They’ve gone through the entire production process and meet all quality requirements. Finished goods might be stored in warehouses or distribution centers awaiting shipment to retailers or direct to customers.

Maintenance, Repair, and Operating Supplies (MRO): These are items used to support and maintain production processes but don’t become part of the final product. MRO includes things like lubricants, cleaning supplies, spare parts for machinery, office supplies, and safety equipment. Though not directly incorporated into products, these items are essential for keeping operations running smoothly.

Understanding these inventory types helps businesses implement appropriate management strategies for each category and properly account for their value in financial reporting.

READ MORE: Inventory Turnover: Ratio, Formula, Best Practices

The Science of Inventory Control: Beyond Stock Counts

At its core, inventory control is about matching supply with demand while avoiding excess and shortages. But that’s easier said than done, especially when:

• Demand is unpredictable. No matter how sophisticated your forecasting is, customers have a habit of surprising you.
• Supply chains are fragile. A single disruption - whether a factory fire, port congestion, or political instability - can send ripple effects across global inventory.
• Holding costs add up. Every extra unit in storage isn’t just taking up space - it’s tying up cash, requiring security, and risking obsolescence.

That’s why modern inventory control is built on both technology and strategy.

Inventory Control Procedures: Keeping Chaos in Check

Inventory is a living, breathing entity - always moving, shifting, depleting, and replenishing. If you don’t control it, it controls you. And that’s how businesses bleed money through stockouts, overstocking, lost products, and inefficient operations.

Inventory control procedures are the backbone of efficient warehouse management, ensuring that every unit is accounted for, every order is fulfilled, and every business decision is based on accurate data. So, how do the most effective businesses control their inventory without being controlled by it? Let’s break down the key procedures that keep operations running smoothly.

Establishing Inventory Control Policies

Before diving into software, audits, and tracking systems, every business needs clear inventory policies that define:

• Who is responsible for inventory management?
• How frequently should inventory counts be conducted?
• What are the reorder points and safety stock levels?
• How should discrepancies and losses be handled?

For example, a leading electronics retailer assigns inventory accountability to a dedicated team that monitors stock levels, reports discrepancies daily, and enforces strict supplier check-ins to prevent shrinkage.

Inventory Tracking: FIFO, LIFO, and FEFO

How inventory is stored and used affects cost, efficiency, and waste. Businesses use different inventory tracking methods based on their industry:

• FIFO (First In, First Out) – Ensures that the oldest stock is sold first, minimizing waste in perishable industries like food and pharmaceuticals.
• LIFO (Last In, First Out) – Used in industries where newer stock is prioritized (e.g., construction materials).
• FEFO (First Expired, First Out) – Essential for perishable goods, ensuring that products with earlier expiration dates are used first.

Supermarkets implement FEFO to ensure that older dairy products get sold first, preventing expiration-related losses.

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What Are the 4 Methods of Inventory Control?

The four main methods of inventory control are:

Economic Order Quantity (EOQ): This mathematical formula determines the optimal order quantity that minimizes total inventory costs, including holding costs and ordering costs. It balances the cost of carrying inventory against the cost of placing orders to find the most cost-effective order size.

Minimum-Maximum Method: This approach establishes both minimum and maximum inventory levels for each item. When inventory falls to the minimum level, you reorder enough to reach the maximum level. This method helps prevent both stockouts and excess inventory by keeping stock within predefined boundaries.

Just-In-Time (JIT): This system aims to receive inventory only when needed for production or sales, effectively minimizing inventory holding costs. It requires precise coordination with suppliers and accurate demand forecasting but significantly reduces warehousing expenses and waste.

ABC Analysis: This method categorizes inventory items based on their value and importance. Not all inventory is equal. Some products need tight control, while others can be monitored with a looser grip. The ABC classification method helps businesses prioritize:

• A items: High-value items (typically 20% of items representing 80% of value). Require tight controls, frequent cycle counts, and real-time tracking.
• B items: Moderate-value items. Need scheduled monitoring but not as frequently as A-items.
• C items: Low-value items (typically 50% of items representing only 5% of value). Checked less often, but managed efficiently to prevent stockpiling.

Imagine this: A pharmaceutical company classifies expensive, life-saving medications as “A-items” for real-time tracking while treating bandages and syringes as “C-items” with periodic checks.

These methods can be used individually or in combination depending on the specific needs and characteristics of a business.

Cycle Counting vs. Physical Inventory Audits in Inventory Control

Counting inventory once a year leads to surprises (and not the good kind). Instead, businesses use two key counting procedures:

• Cycle Counting – Small, frequent counts of specific stock items to ensure real-time accuracy.
• Full Physical Inventory – A complete warehouse audit, usually done quarterly or annually.

A fashion retailer performs weekly cycle counts on high-value items (designer handbags) while conducting a full physical audit every six months.

Supplier and Vendor Management: The Role of Inventory Control

Inventory isn’t just about what’s in your warehouse - it’s also about who supplies it. Efficient businesses don’t just buy stock - they build relationships with reliable suppliers.

• Negotiate flexible supply contracts to accommodate demand fluctuations.
• Establish vendor performance metrics to track delivery accuracy, speed, and quality.
• Diversify supplier sources to reduce dependency on a single vendor.

Automotive manufacturers use multi-supplier sourcing strategies to avoid disruptions when one supplier faces production delays.

LEARN MORE: Order Automation: Benefits for AR Process in Inventory Management

Handling Inventory Shrinkage and Loss Prevention

Inventory doesn’t always disappear for innocent reasons. Shrinkage due to theft, mismanagement, and errors can erode profits.

Strategies to Minimize Shrinkage

• Surveillance & security – CCTV, access control, and employee accountability.
• Barcode & RFID tracking – Reduces manual errors and theft.
• Regular auditing – Detects discrepancies before they become significant losses.

Retail chains like Walmart use RFID systems and AI-powered loss prevention analytics to identify potential theft patterns and anomalies in inventory records.

Demand Forecasting: Predicting the Future of Inventory

Guessing leads to either stockouts or overstock - neither of which is good for business. AI-driven demand forecasting helps businesses:

• Anticipate seasonal trends
• Optimize warehouse space
• Reduce holding costs

Fashion brands use AI to predict clothing demand based on past sales data, upcoming trends, and even weather forecasts, ensuring they stock the right styles at the right time.

As you can see, effective inventory control isn’t just a procedure - it’s a competitive advantage. Whether it’s preventing stockouts, reducing shrinkage, or optimizing cash flow, the right inventory procedures separate thriving businesses from those constantly putting out fires.

The key? Balance. The right technology, best practices, and human oversight ensure that your inventory is working for you, not against you.

The Technology Revolution: AI, IoT, and Inventory Control Software

AI is changing inventory management in ways unimaginable a decade ago. Traditional systems react to inventory changes, but AI-driven platforms predict them. Advanced algorithms analyze historical sales, seasonal trends, and supply chain patterns to optimize restocking decisions automatically.

For example, Amazon’s warehouses aren’t just massive - they’re data-driven nerve centers. AI predicts demand shifts before they happen, dynamically shifting inventory between fulfillment centers before customers even place an order.

Automating Inventory Control with Software

Gone are the days of paper logs and spreadsheets - modern inventory control demands automation. Inventory management software like NetSuite, SAP, and Microsoft Dynamics 365 integrates with supply chain systems to:

• Automatically track stock levels
• Send alerts for low inventory
• Integrate with accounting and order fulfillment systems
• Reduce human error

A warehouse uses RFID scanners integrated with an ERP system to track real-time movement of products from inbound shipments to final sales.

IoT-Enabled Real-Time Tracking in Inventory Control

Gone are the days of counting inventory manually (unless you enjoy the thrill of a 3 AM stock audit). With IoT (Internet of Things), businesses can track goods in real-time, monitoring everything from temperature-sensitive pharmaceuticals to high-value electronics.

Retailers like Walmart use RFID (Radio Frequency Identification) tags on products, allowing real-time tracking of stock as it moves across the supply chain. The result? Fewer lost products, better restocking strategies, and reduced shrinkage.

READ NEXT: How IoT and AI Are Revolutionizing Inventory Tracking Systems

Inventory Management Software: The Backbone of Modern Operations

For growing businesses, spreadsheets won’t cut it. Inventory management systems like NetSuite, SAP, and Odoo help automate everything from order tracking to stock replenishment, ensuring nothing slips through the cracks.

What Makes a Great Inventory Control System?

• Multi-location tracking – Know where every unit is, across every warehouse and store.
• Automated restocking – Prevent stock-outs without over-ordering.
• Integration with accounting & procurement – Sync inventory data with financials for a real-time view of costs.

The Role of InvoiceAction and OrderAction in Inventory Control

Inventory control doesn’t exist in isolation - it’s deeply connected to accounts payable (AP), accounts receivable (AR), procurement, and sales order management. When these processes aren’t streamlined, inventory discrepancies occur, leading to stock shortages, overstocking, or financial mismanagement. This is where InvoiceAction and OrderAction play a crucial role.

How InvoiceAction Enhances Inventory Control

InvoiceAction automates invoice processing, ensuring accurate, timely payments for inventory procurement. When businesses rely on manual invoice matching, data entry errors, and delayed approvals, inventory replenishment suffers. InvoiceAction solves this by:

Automating 3-Way Matching (Invoice, PO, Goods Receipt)

• Ensures only verified inventory purchases are processed
• Prevents overpayments, duplicate invoices, and procurement fraud

Reducing Processing Delays

• Eliminates slow, error-prone manual invoice approvals
• Ensures suppliers get paid on time, preventing supply chain disruptions

InvoiceAction also improves real-time financial and inventory visibility by integrating directly with ERP and inventory management systems, so that updates inventory costs happen in real-time, improving demand planning.

Here’s the latest example: A manufacturing company using InvoiceAction reduces invoice processing time by 70%, ensuring that new raw materials are ordered and paid for without delays, preventing factory downtime.

How OrderAction Enhances Inventory Control

OrderAction optimizes the entire sales order cycle, ensuring inventory levels are accurately updated based on real-time customer demand. Without automated order processing, businesses struggle with:

• Missed or delayed orders leading to stock imbalances
• Manual order entry errors creating discrepancies in stock levels
• Slow fulfillment processes causing customer dissatisfaction

OrderAction solves these challenges by eliminating manual data entry errors by extracting and validating order data automatically, as it ensures orders are processed instantly, updating inventory in real time.

OrderAction also syncs inventory with demand by matching customer orders with available stock levels and triggering automatic restocking alerts when inventory runs low.

Enhancing Order Accuracy & Reducing Returns

OrderAction cross-checks order details with customer purchase history, credit limits, and shipping preferences. This minimizes errors that lead to stock misallocation and unnecessary returns.

For example, an e-commerce retailer using OrderAction sees a 40% reduction in fulfillment errors, ensuring that customer orders align perfectly with available stock levels, reducing overstock and stockouts.

How InvoiceAction and OrderAction Work Together for Better Inventory Control

1. A supplier invoice is received: InvoiceAction validates it against the purchase order (PO) and goods receipt before approving payment.
2. A customer places an order: OrderAction extracts and processes it, checking inventory availability in real time.
3. Inventory is updated automatically: Sales and procurement teams get an accurate, real-time view of stock levels, preventing discrepancies.
4. Financial records remain in sync: ERP systems reflect accurate data on stock movement, procurement costs, and incoming revenue.

By integrating InvoiceAction and OrderAction into inventory control processes, businesses gain a competitive edge - ensuring stock accuracy, financial efficiency, and seamless operations across procurement and order fulfillment.

Best Practices: What the Most Efficient Businesses Do Differently

Adopt a Hybrid Approach to Just-in-Time & Safety Stock

JIT works well - until supply chains fail. The smartest businesses balance lean inventory with critical reserves, ensuring essential stock is always available without overstocking non-essentials. After the 2021 supply chain crisis, auto manufacturers stopped relying entirely on JIT and started stockpiling critical semiconductors, preventing future production shutdowns.

Set Reorder Points (ROP) and Safety Stock Levels

Guesswork is dangerous in inventory control. The best businesses establish data-backed reorder points to ensure stock is replenished before running out.

Formula:

ROP = (Average Daily Usage × Lead Time) + Safety Stock

Example: A pharmacy using automated restocking alerts ensures life-saving medications never fall below safe levels, preventing potential shortages.

Regular Audits: Trust But Verify

Even the best inventory software isn’t foolproof. Routine cycle counts (small, frequent audits) help spot discrepancies before they become major financial losses. Retailers like Target use a daily spot-check system instead of waiting for massive quarterly inventory reconciliations. The result? Fewer losses and faster problem detection.

Train Your Team: Technology Alone Isn’t Enough

Software doesn’t run itself. The best inventory control strategies combine automation with trained employees who understand how to interpret data, spot discrepancies, and handle exceptions. An e-commerce brand implementing an advanced ERP system trained its warehouse staff on inventory analytics, leading to a 20% improvement in order accuracy.

Final Thought: Inventory Control is a Constant Balancing Act

The businesses that master inventory control don’t just see it as a backend function - they treat it as a strategic asset. A well-managed inventory system improves cash flow, customer satisfaction, and operational efficiency, while poor inventory control can sink even the most successful businesses.

Whether you’re running a small e-commerce store, a manufacturing plant, or a multinational retail chain, inventory management is the invisible force that keeps everything running smoothly. With the right mix of technology, best practices, and strategic foresight, you can turn inventory from a liability into a competitive advantage.

Now, ask yourself: is your inventory working for you, or are you working for it?