Business Inventory Management Software
What is inventory management?
Inventory management is the process of arranging the flow of goods through a company into a continuous cycle of ordering, storage, production, sales and restocking. Inventory management is generally performed at two levels: total inventory management, stocking location and item level inventory management. When determining their inventory strategy, companies choose between minimizing the amount of cash tied to inventory or holding more inventory to maximize customer service or production efficiency.
The inventory strategy includes item-level inventory management with principles such as safety stock (explained later) and inventory controls through policies such as ABC classification to prioritize replenishment rates that take into account item-level characteristics such as consumption value, lot sizes, and order wait times.
Inventory is basically divided into three categories: raw materials/components, work in progress and finished goods. Manufacturing companies purchase raw materials or components, store them until they are ready for production, and turn them into finished goods. Non-manufacturing companies such as wholesale distributors and retailers stock finished goods for sale to final consumers.
Because inventory consumes a company’s cash and incurs transportation costs, all companies must strike a balance between inventory levels and demand. Regardless of business type, companies need to exercise tight control over inventory to save cash while making sure they have enough stock to match production schedules or estimated customer demand and actual orders.
Advantages of inventory management
Inventory management is complex and varies depending on your industry, your function within the company, and the type of item being managed. Deciding how to plan and manage inventory is a collaborative effort filled with choices, risks and rewards.
Every company is different. Depending on their business model, companies use several different methods to manage inventory. Inventory is costly to the company, but it may be necessary to keep more safety stock in order to maintain superior service levels to avoid stockout and maximize operational efficiency. Manufacturers with expensive machinery and people operations sometimes carry excess inventory to avoid shutting these operations down due to a lack of inventory, and this costs the company more.
Nearly all companies maintain an inventory of safety stock to protect against unexpected changes in supply and demand. In this way, the inventory acts as a protection against the unexpected and a buffer against production interruptions. Safety stock represents the balance between service or fill rates (the percentage of customer orders a company can ship immediately from stock) and the additional cost of ordering and holding more inventory. The result of not enough inventory is running out of stock, which can hurt a business, especially if customers have alternatives such as e-commerce-based businesses where they expect fast order fulfillment. Running out of stock represents lost revenue and can negatively impact customer loyalty.
Manufacturers often set up inventory controls such as minimum and maximum stocking levels and reorder points within their ERP systems. Distributors set up decentralized reorder points that allow each distribution center to determine inventory levels based on local factors or demand-based methods. Local factors may include SKU-level demand, waiting times, or seasonal patterns. Demand-driven methods may include point-of-sale data from retail customers. Many sourcing organizations consider pricing discounts in their purchasing strategy and may purchase more supplies than necessary to achieve favorable price points.
Inventory management: Financial implications
Inventory management involves making choices between revenue, cost and risk. Inventory classified as a current asset on the balance sheet consumes company cash. Consideration should be given to the length of the cash conversion cycle: the time between the purchase of raw materials (for a manufacturer) or merchandise (wholesale or retailer) and the final sale of finished goods and receipt of payment from customers.
Cash remains tied during this time, and companies must ensure that their inventory is sold on time (called inventory turnovers) to return the cash to business. Slow-moving inventory causes portfolio costs, risks and adverse effects on the company’s cash flow. Accordingly, companies need a disciplined process to ensure that the level of inventory investment is in line with the expected level of customer demand.
Inventory management requires tight costing to support both internal management reporting and statutory financial reporting. Inventory costs used in production must conform to transport costing methods in order to allocate both direct and indirect labor and overhead to products as they take shape on the production line. Also called merchandise inventory, finished goods require allocating all the costs associated with preparing them for sale.
These costs may include transportation, labor and other transportation expenses. The total is the sum of all inventory in the company used to determine the inventory line item on the balance sheet and the cost of goods sold on the income statement.
What are the types of inventory management systems?
Businesses use a variety of inventory management systems depending on their operations, complexity or needs. Examples of the three primary inventory management systems are manual, periodic and continuous systems. Perpetual systems are the most advanced and accurate inventory management systems, while the manual method is the least sophisticated way to control inventory transactions.
Manual inventory system: This inventory management method relies on physical counting of items and recording details on paper or a spreadsheet. This process is widely used by small businesses that have not migrated to inventory management software solutions.
Periodic inventory system: This is an inventory management system where inventory is counted at the end of an accounting period rather than after each sale and purchase. It is a relatively simple system that is more suitable for small businesses with fewer goods.
Perpetual inventory system: The system is the most advanced, leveraging automated software solutions to deliver real-time insights. As soon as any stock enters a facility, is moved, sold, used or disposed of, the inventory system immediately updates balances with scans from handheld devices that scan pen barcodes or RFID tags.
Radio frequency identification (RFID) system and inventory management systems
RFID is a technology tracking system that supports inventory management systems. RFID systems use special tags attached to each item to track its whereabouts. RFID simplifies inventory management by scanning new inbound shipments into the system or outbound shipments using mobile scanners. RFID tags can be active, broadcast a continuous signal, or be passive and require physical readers to track the items. RFID tags are the best method to always provide real-time data and insights about where inventory is located.
Inventory management and periodic counting comparison
Periodic counting is a check and balance method used to confirm that physical inventory counts match the company’s inventory records. Periodic counting of individual items throughout the year ensures the accuracy of inventory quantities and values.
Having the right system for monitoring current inventory quantities is important for managing supply and demand, maintaining high levels of customer service, and planning production.
Instead of taking advantage of inventory management systems, you can perform periodic counting to get complete physical inventories. Alternatively, businesses can use both techniques side-by-side to verify inventory quantities and values. Inventory management supports serial periodic counting.
Inventory management examples—industry use cases
While inventory management is common in most industries, there are certain industries with unique requirements that provide specialized systems. Important examples are food service (restaurants) and retail.
Retail inventory management
Retailers today must offer very flexible customer purchasing options for goods offered through different channels. Intense competition from large e-commerce vendors and demanding customers has led retailers to store physical stores and online purchases, referred to as omnichannel retailing.
has forced them to carry out a mixed business model by combining their experiences.
The omnichannel approach provides buyers with flexible options such as ordering in-store, shipping home, purchasing online, returning in store, or shipping to store for pickup from a distributor. The goal is to deliver an excellent end-to-end customer experience that can mean the difference between success and failure.
To deliver the best customer experience through an omnichannel approach, retailers need real-time visibility into their on-hand inventory so that the customer shopping experience results in an order. Out of stock not only prevents certain orders from being fulfilled, but disappointed customers are also very likely to search for similar items in a competitor’s store or website. Loyalty is temporary and rebranding is common. Lost customers may never return, impacting future sales.
As a result, retailers carefully manage inventory to master the fine line between having enough inventory to fill the highest percentage of customer orders and having too much inventory at the end of the purchasing season, risking excess unsold inventory at the end of the purchasing season and straining their cash flows. way they should be managed. Retail inventory management software (combined with order management systems) allows retailers to quickly react to changes in purchasing behavior and adjust channel strategies and inventory levels.
Restaurant inventory management
Managing restaurant inventory should provide real-time content tracking. That’s because most of the inventory is fresh, has a short shelf life, and is carefully monitored until consumption. The system must also carefully monitor stock levels, trigger restocking orders, record new inventory receipts, and help manage menu costs.
Managing fresh ingredients is an inherently challenging process, helping managers closely monitor their shelf life to prevent spoilage. At best, spoilage wastes money, in the worst case it can cause food poisoning and trigger action by health authorities.
Inventory management software can help restaurants manage their unique challenges. By automatically linking sales with inventory levels, restaurants can gain insight into orders, consumption, material stocks, prevent spoilage and manage profit margins. Inventory management software also reduces time spent on management tasks by alerting managers about potential shelf life expiration, automating reordering when items pass their spoil date or fall below set replenishment levels.
Inventory management software
Modern, cloud-based inventory management systems provide comprehensive materials management capabilities that effectively manage the flow of goods across your company and its global supply network. In conjunction with sourcing management systems, they provide accurate and timely visibility into inventory levels by restocking plans and fulfillment rates, all of which impact customer satisfaction. Together with supply chain planning systems, they achieve predictive results through inventory management by matching demand to supply by optimizing stocking levels, increasing order fulfillment rates, enabling scheduled production runs and improving working capital utilization.
