Inventory Management Systems

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An inventory management system is how businesses track and control stock before it is sold. Whether automated or manual, inventory systems seek to bring your inventory carrying costs down while ensuring sufficient stock is available to meet customer demand.

Here’s a guide to finding one that matches your company’s requirements.

We explore different types of inventory management systems and see how they work, with examples and helpful buying advice. Keep reading to learn more.

In this guide:

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.

If you’re holding a lot of inventory in your business, you need to stay efficient and maintain healthy margins. An effective inventory management system exists to help you achieve this.

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Any company dealing with physical goods must find a solution for managing inventory.

In some cases, an Excel or Google Sheets spreadsheet will suffice as a company’s inventory management system. However, many firms opt for dedicated inventory management software designed to boost efficiency and bring costs down.

Factors such as your business’s size, complexity, and inventory requirements determine what the best inventory management system will be for your specific circumstances.

Why you need an inventory management 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.

A recent report revealed that retailers with more than 60,000 products can reduce the labour costs of manual stock audits by over USD 70,000 per year with an automated inventory management system. And they offer plenty of advantages for smaller operations as well.

Here are five benefits of inventory management systems:

  • Greater inventory visibility – inventory systems allow you to track all your inventory movements, so you always know how much stock of each item you have, where it’s located, and when to reorder.
  • Meet customer demand – an accurate system can help you reduce stockouts, meaning you never miss out on potential sales and are able to provide good customer service.
  • Understand your profitability – by recording all your inventory data in a system, you can break down the costs of producing and selling goods. This is useful for understanding the total value of your inventory and determining profitability at the product and business levels.
  • Improves workflow efficiency – when you use a system to track and manage inventory, you don’t have to manually check how much stock is available every time you need to know.
  • Essential for accurate financial reportingaccounting for inventory is impossible if you don’t keep track of your stock and purchases. Inventory management systems provide an effective way of monitoring the true value and profitability of your business.

For manufacturers, inventory systems also break down what you’ll need to assemble a product – and the quantities and locations of each component or ingredient.

How does an inventory management system work?

An online inventory management system works by automating the process of updating stock levels and inputting data to track goods through the supply chain.

But it can also do a lot more than that.

Inventory systems can be used to facilitate faster purchasing; manufacture products using a Bill of Materials; fulfil customer orders from multiple sales channels; and streamline dozens of other common inventory control processes.

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There are countless inventory management solutions you can adopt, ranging from simple approaches to comprehensive solutions. Let’s look at some examples.

Inventory management system examples

Inventory management systems come in many shapes and sizes.

Some are simple pen-and-paper or spreadsheet systems that rely on manual data entry. Other options include highly sophisticated, highly complex software systems that can automate much of the inventory management process.

1. A small business using a spreadsheet system

First, consider this example of an inventory management system in a small business:

Carlos and Maria run a business that sells food hampers. They have various suppliers from whom they purchase food and ingredients in bulk – some of which must be split up and repackaged.

Carlos creates an Excel spreadsheet, which he updates whenever he orders more stock or assembles a hamper. Maria runs the shop, so she updates the spreadsheet anytime a sale is made. This is their inventory management system.

Carlos and Maria are entirely dependent on the spreadsheet to know how much stock they currently have, the dates their food products might expire, and when to reorder more ingredients.

Now let’s look at another example.

2. A global enterprise using a cloud-based system

ToyFun Inc. manufactures children’s toys. They sell them wholesale to retailers around the world. They also sell direct-to-consumer (D2C) through several online sales channels.

ToyFun makes and sells so many products that they need three separate warehouses to store everything. Because they have so many parts and products to manage, they use a cloud-based inventory management software system to keep track of all their stock.

The software lets them see exactly how many stocked items they have across all their different warehouses. It automatically syncs online sales with their recorded inventory to ensure stock levels are always accurate.

ToyFun also uses an online inventory system to generate inventory reports based on historical sales data. This helps them forecast future demand for sales. They can even assess the reliability of their suppliers based on previous lead times.

As a result, ToyFun can make smarter purchasing decisions that preserve cash flow and support growth.

Types of inventory management system

There are now dozens of types of inventory management systems to choose from. For complex businesses, there are large enterprise software and bespoke, specialised systems. Some types of inventory systems cater to a single industry, such as coffee production.

We’ve collated the most common types of inventory management systems you need to know. 

Drumroll, please.

Spreadsheet-based inventory management system

Spreadsheet-based systems (using an Excel or Google Sheets doc to track inventory) can offer a great way of managing inventory on a basic scale.

However, spreadsheet inventory systems come with a few downsides.

Human errors, for instance, can easily snowball into costly problems when using spreadsheets. Plus, flexibility and accuracy can be hard to come by.

Spreadsheets are low-cost, easy to set up, and work fine for companies with simple needs.

But if the spreadsheet breaks, so does your inventory management system. They require a lot of manual input and analysis. And as your business gets more complex, it’ll become unwieldy.

Basic stock management system

Some cloud-based business apps – accounting software, for example – come with basic inventory management functionality.

While not the comprehensive tool that you’ll get with dedicated inventory management software, it’s often the next step from spreadsheets. These systems typically allow you to connect inventory tracking to whatever workflow the app was built to optimise.

Unfortunately, basic stock management systems often lack the most important features required by medium–large or complex business types.

Automated inventory management system

Automated stock management software is specifically designed 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 and access your data anywhere, at any time.

The purpose of an automated inventory system is to reduce admin, improve visibility and accuracy, and streamline your operational processes. That means less time and money spent managing inventory – and more time spent making sales.

The downside is that automated systems can take some time to get set up and trained on. That’s why some businesses choose to invest in onboarding packages or implementation partners to ensure a smooth set-up process.

Warehouse management system

A warehouse management system is designed to help companies organise, manage, and optimise their storage facilities.

Warehouse management is about empowering your warehouse team to operate as efficiently as possible. The software typically comes with tools for streamlining the management of goods inside a warehouse.

A warehouse management system (WMS) can be beneficial to your inventory control, but it shouldn’t be confused with an inventory management system. WMS solutions often lack key features of inventory management software, such as purchasing, production, and stock control.

3PL inventory management system

A 3PL inventory management system is a software tool that helps third-party logistics (3PL) companies track and manage all the goods coming in and out of their fulfilment centres.

Key features of a 3PL inventory system include:

3PL providers typically work with multiple clients that have different requirements, so a comprehensive inventory management system is often required.

Accounting and inventory management system

An accounting and inventory management system can be a single piece of software or two or more integrated cloud-based solutions that enable a business to synchronise inventory management with financial reporting.

The primary benefit of connecting your accounting and inventory management systems is that it ensures accuracy and consistency across the business. Stock movements are automatically recorded in both systems, enhancing visibility around the costs of doing business and the company’s current value.

ERP inventory management system

An enterprise resource planning (ERP) system, or ERP inventory management system, is a single solution to cover every aspect of business planning – instead of multiple different cloud components that integrate seamlessly with each other.

There are many pros and cons to choosing an ERP system over dedicated inventory software.

A major benefit is that you only need to learn one system and deal with a single software vendor. You also get a single solution that might cover inventory, accounting, supply chain, HR and more.

However, there are major risks involved in using single-vendor ERP software.

Namely, ERP implementation can be expensive – as can monthly or annual subscriptions. There’s also a chance the software will do a hundred things well but no one thing great. And if the system breaks down, your entire business breaks down too.

Barcode inventory management system

Barcode inventory management systems enable companies to track and manage their goods using printed labels known as barcodes. Mobile scanners or smartphones are used by operations teams to record the movement of barcoded items.

Along with improving picking and packing accuracy, barcode inventory systems also offer greater supply chain visibility as the same barcode can be used by multiple businesses. The National Library of Medicine reported a 41.4% reduction in the number of medication administration errors after implementing a barcode system.

The downside is that some training and set-up are required to get started, and hardware may also need to be purchased.

Cloud-based inventory management system

A cloud-based inventory management system, or cloud-based inventory software, is a digital system in which stock levels and inventory data are recorded using the Internet. This enables businesses to track inventory remotely and integrate it with other cloud software systems.

By reducing the need for manual stock checks and other administrative tasks, cloud inventory systems streamline order management and reduce the costs of managing inventory.

Asset inventory management system

An asset inventory management system is a tool that helps businesses manage the resources they rely on to operate. In most cases, those resources are physical assets such as tools, machinery, and company vehicles. However, asset inventory management can also cover digital assets and intellectual property.

While standard inventory management systems focus on the inventory related to products being sold, asset inventory management tools focus on the inventory required to run the business.

Specialised systems exist for asset inventory tracking. However, it’s also possible to manage asset inventory using regular inventory management software or a spreadsheet-based system.

Periodic vs perpetual inventory systems

There are two main ways in which companies manage inventory: periodic systems and perpetual systems.

Let’s 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.

What’s the best type of inventory management system?

Perpetual inventory management systems are generally considered the best for companies dealing with medium–large amounts of stocked items or complicated fulfilment processes. Perpetual systems give you instant visibility across your inventory levels in real time, facilitating smarter purchasing and sales decisions.

Inventory management system features

If you’re in the market for an inventory management system, it’s important to know which functions are important and which you could live without.

Some inventory systems can perform countless tasks – but if none of those are relevant to the way you operate, you may be better off with something a little less fancy (and a little more affordable).

To help you determine what functionality you need, we’ve outlined some of the key features of inventory systems and why they’re helpful below.

Here’s a shortlist of the most useful inventory management system features:

  • Live inventory tracking: Perpetual systems offer live inventory tracking that tells you exactly where your items are, their quantities, and how much they’re worth. This greatly reduces staff labour time and improves the accuracy of your financial reporting.
  • Purchasing management: Inventory systems that enable you to send and receive purchase orders facilitate better synchronisation between accounting and sales. And the ability to save suppliers’ details greatly streamlines the entire procurement process.
  • Cloud integrations: The ability to integrate with other cloud-based solutions, such as accounting or CRM software, offers significant advantages to the business. Rather than wasting time entering the same details twice, cloud integration systems do the double entry for you – and reduce the risk of inconsistencies and errors.
  • Barcode scanning: Inventory management systems with barcode scanning functionality help to increase fulfilment accuracy and order-picking efficiency. Barcodes can be applied to stock items and scanned whenever they’re moved or used to auto-update the quantity and location in your inventory system.
  • Inventory reporting: Inventory reports allow you to track the health of your business, identify problems, and capitalise on sales trends. Inventory systems with reporting functionality can use historical purchasing and sales data to paint a picture of what’s working well and highlight opportunities for improvement.
  • Inventory optimisation: Inventory optimisation refers to advanced analysis tools designed to help you better plan your inventory for the future. It uses demand forecasting and planning software that can tell you how much of each item you should order, and when, so you never run out of stock or hold too much of it.

When purchasing an inventory management system, focus on the functionality that’s likely to save you the most money and time – not the nice-to-haves that aren’t as relevant.

Consider the processes you currently rely on to manage your business; which of these will benefit most from the features above?

How much does an inventory management system cost?

Inventory management systems can range in price from completely free to monthly subscriptions that cost thousands of dollars. When we researched over 70 software providers listed on the software review site Capterra, our findings revealed that the average inventory management system costs USD 175 per user license per month.

Cloud-based inventory system users can also expect to pay around USD 80 per month for ongoing customer support, and USD 789 on average for one-time set-up fees.

For large enterprises looking to invest in multi-faceted ERP inventory solutions, implementation fees can cost anywhere from USD 10,000–40,000. There are also the costs of disruption to the business during implementation to consider.

When to upgrade your inventory management system

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.

Slowing growth

Maybe your salespeople have to contact your stockroom to 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.

Find out more about upgrading to automated inventory management, or take the next step by learning why accurate inventory control is vital to your business.

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