Inventory management systems
You’ve learned the basics of inventory management — now you need to develop a process for how you track and control your stock. Here’s a guide to choosing an inventory management system that matches your company’s requirements.
What is an inventory management system?
An inventory management system (or inventory system) is the process by which you track your goods throughout your entire supply chain, from purchasing to production to end sales. It governs how you approach inventory management for your business.
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Each company will manage stock in their own unique way, depending on the nature and size of their business. Let’s take a look at a simple example.
Inventory management system example
Carlos starts a business selling food hampers. He has various suppliers who sell him food in bulk, some of which must then be split up and repackaged.
Carlos creates an Excel spreadsheet, which he updates whenever he orders more stock, assembles a hamper or completes a sale. This is his inventory management system, and he’s entirely dependent on it to know how much stock he currently has, when his food products might expire, how many hampers he can sell and more.
Why you need an inventory system
Any venture that handles stock will need a system to accurately track and control it. Without one, you’ll be working on an entirely ad-hoc basis — and you’ll quickly run into situations where your business is overstocked or understocked.
Inventory systems tell you the number of components or ingredients you need to create or assemble your final product. Without this information you may end up with excess stock, eroding your bottom line, or with insufficient stock to meet customer demand.
But while you will need an inventory management system, which one you choose is entirely up to you. There are countless different systems you can adopt, ranging from simple approaches to comprehensive solutions.
Periodic vs perpetual inventory systems
There are two main ways in which companies manage inventory: periodic systems and perpetual systems. Let’s take a look at the difference between the two.
What is periodic inventory?
Periodic inventory is a way of managing stock that relies entirely on stock taking. Businesses with a periodic system count their stock regularly — say, every 3 to 6 months — to verify stock accuracy, checking whether stock levels match up to sales figures.
What is perpetual inventory?
Perpetual inventory is a system that involves tracking stock levels as goods are receipted, produced, sold, or returned to the store. Perpetual inventory systems tend to deliver the most up-to-date inventory figures, with less dependence on stock takes for accuracy.
Types of perpetual inventory management system
Using spreadsheets to manage inventory
Plenty of businesses follow Carlos’ example and start off using Excel: it can be a great way of managing inventory on a basic scale. However, this does come with a few downsides. Human errors, for instance, can easily snowball into costly problems when using spreadsheets. Plus, flexibility and accuracy can often be hard to come by.
Pros: Spreadsheets are low cost, fairly easy to set up, and work fine for companies with simple needs.
Cons: If the spreadsheet breaks, so does your inventory management system. And as your business gets more complex, it’ll quickly become unwieldy.
Basic inventory management software
Many cloud-based apps come with basic inventory management functionality. While not the comprehensive tool that you’ll get with dedicated inventory software, for many it’s the natural next step from spreadsheets. You may find that you still need spreadsheets to cater to your specific requirements, though.
Pros: No need to find and install a new solution, most applications are cloud based
Cons: Often difficult to match to your specific needs
Dedicated inventory management software
Dedicated stock management software is developed specifically to help you track and control stock. If the software is cloud based, you’ll be able to sync it up with your other cloud applications (Unleashed, for example, integrates with Xero, QuickBooks, Amazon, Shopify, Vend and hundreds of other apps), and access your data anywhere, at any time.
Pros: A powerful solution that’s easy to integrate into other systems. Fully flexible, and designed specifically for the task.
Cons: Requires proper setup to function to its full potential
Enterprise resource planning systems
With enterprise resource planning (ERP), you buy a single solution to cover every aspect of business planning — instead of multiple different cloud components that integrate with each other. This typically involves choosing and installing the ‘modules’ that you need, including inventory management.
Pros: Get a single system that might cover inventory, accounting, supply chain, HR and more.
Cons: Expensive (with ongoing costs for maintenance and upgrades), requires considerable time and manpower to implement, tailored software might well do each task better
Warehouse management systems
Warehouse management systems can be hugely beneficial to your inventory control, but they shouldn’t be confused with inventory management systems. Warehouse management is all about empowering your warehouse team to operate as efficiently as possible — while many inventory systems may have some functionality to assist with this, it won’t be as comprehensive as a dedicated warehousing tool.
Find out more about warehousing systems.
When to upgrade your inventory management
Moving onto a dedicated inventory solution can provide massive benefits to your business, but it is a step change. Here are some signs that it might be time to upgrade.
You need more flexibility
Spreadsheets are an inflexible way to manage inventory. If you find that you need to add extra sheets to your solution, or are struggling because employees can’t access real-time data, then it might be time to upgrade to cloud-based inventory software.
You need more accuracy
Do you find it difficult to track how much of a particular item you have at any one time? Using a dedicated solution, you — and your employees — will be able to get up-to-date information on your inventory at any time, from any place.
Inventory costs are growing
Holding costs can severely undermine your bottom line when they are not kept under control. The key to minimising holding costs is only to store as much stock as you need. An efficient inventory management system helps you keep your storage efficient.
Maybe your salespeople have to contact your stockroom to get find out what they have to sell, or you find yourself spending too much time manually writing reports rather than focusing on your customers. Slowing sales can be a symptom of poorly managed stock — dedicated software can help you quickly return to growth.
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