How an inventory management system works

In modern business, effective inventory management is a key factor in running a successful supply chain. Many businesses utilise inventories for a number of different reasons, but if they are not being managed properly, certain processes may not run smoothly, orders may be incorrectly organised, data could be lost, incomplete or inaccurate and the business may be spending more money or operating in a less efficient way than it otherwise could be.

A proven method of improving the effectiveness of inventory management – as well as related processes such as warehousing and distribution – is through implementing and sticking with a consistent inventory management system. In this blog, we explain what an inventory management system is, how it can help, what it can help with, the different types a business could consider using and how a business could begin to implement an effective inventory system.

Inventory management systems are structures that improve the ability to organise, track and monitor the supply chain. It encompasses every element of a business’ day-to-day operations, offers full transparency over the effectiveness of the supply chain and simplifies the ability to implement changes.

A system that is designed to manage inventory is required to incorporate a potentially vast selection of different areas. But what exactly are these areas?

Primary functions of an inventory management system include:

• Boost profitability
• Better control stock
• Enhance productivity and efficiency 
• Ensure efficient time management
• Improve quality of service
• Increase effectiveness of supply and demand process
• Organise supply chain process
• Protect inventory
• Reduce likelihood of stock-out and over-stock
• Report on inventory
• Track individual orders

While an inventory management system is an effective way of improving a business’ active supply chain, it isn’t a one size fits all process. Instead, there are different types of inventory management systems that work for different types of businesses. This could depend on the  size of a business or the specific industry it operates in. However, whatever a business’ specific circumstances, there will be a suitable inventory system that works for them.

Below, we’ve outlined a brief description of the primary inventory management systems.

Types of inventory management systems include:

Periodic inventory system

A traditional approach, a periodic inventory system is the process of physically counting all inventory items at specific, predetermined periods of time and recording this data in a written or digital database. The data from each time period can then be compared to determine whether new inventory is needed or any changes could be made to improve the supply chain process.

An advantage to this approach is that it’s tried and tested, and as it doesn’t necessarily require advanced technology, it’s quick and cost effective to implement. Automation is a common theme for many business processes, but a benefit that many business owners find with a periodic inventory system is that it is traditional and doesn’t rely on technology, allowing them to be in complete control.

Perpetual inventory system

Updating inventory data as soon as any changes are made or new stock is added. A digital computer programme is then used to identify when these changes happen and store all inventory data. Using a digitised system also means that barcode scanners or radio frequency identification tags can be utilised to improve the tracking and tracing of every inventory item.

Through using an entirely computerised system for inventory management, a business is given the benefit of data being accurate, precise and reliable. It also offers automation, allowing members of staff who may have otherwise had to store and update information manually to focus their attention to other tasks. Not only does this help small businesses that need to utilise the time of each staff member effectively, but also large businesses that have a lot of inventory, orders and data to manage.

In a setting that uses any level of inventory – whether it’s various parts for manufacturing products or items that are being sold as part of an e-commerce business – an effective management system is fundamental to a functioning supply chain. Depending on the system a business chooses, key functions can be automated, reducing the likelihood of human error.

With all data on one platform, it can also simplify many previously complicated processes and make it far easier to identify any areas that the supply chain is lacking. Once these changes are recognised, an inventory management system facilitates the opportunity to implement potentially impactful and cost effective changes that could be valuable to the business.

Many modern businesses will have some form of inventory management system. It could be the case that a business doesn’t have an inventory system in place, but as it can help with the organisation, effectiveness and efficiency of a supply chain, it would be worth considering.

However, the decision to start using an inventory system is only the first step. Investing in an effective inventory management system is something that takes a lot of thought and research. But first, there are several factors that need to be considered. For instance, in order for an inventory system to work, a business needs to have a warehouse or another storage facility that can be used as a basis for organising and managing inventory. It would also help to compile business data for all forms of inventory so it’s ready for adding to the system. At this point, the most suitable strategy can be chosen based on the business’ specific needs, requirements and processes.