Inventory Management Systems: An Introductory Guide

An inventory management system is crucial for businesses to track stock levels, orders, sales, and deliveries efficiently. Inaccuracies in inventory management can lead to stockouts, overstocking, and other missteps that erode a company’s profit margins and diminish the customer experience.

With so much at stake, it’s vital to understand the types of inventory management systems and how they can help you better manage your business. 

What Is an Inventory Management System?

An inventory management system refers to the set of processes and technologies a business uses to track stock throughout the entire supply chain. It is a vital component of supply chain management and has a direct impact on inventory visibility.

Whether you use multiple sales channels or have a centralized point-of-purchase, inventory management helps you ensure that your available stock aligns with customer demand. The goal is to avoid dead stock while maintaining adequate inventory to facilitate on-demand purchasing.

You want to make sure customers can buy what they want, when they want, without holding too much stock.

How Does an Inventory Management System Work?

Traditionally, inventory management relied on manual processes, such as hand-counting stock and updating physical logbooks at predetermined intervals (i.e., daily or weekly). However, manual inventorying methods are prone to human error, which negatively impacts the accuracy of stock counts. 

Today, modern technologies like enterprise resource planning (ERP) systems automate inventorying through barcoding and other processes. 

Think of the last time you visited the grocery store. Every time the clerk scanned an item, the information was routed from the point-of-sale (POS) system to the back-end inventory management software. The software updates inventory records to ensure that stock counts are always accurate.

Types of Inventory Management

While the most advanced inventory management platforms offer real-time inventory accounting, many businesses still rely on less sophisticated approaches. Here are a few of the various inventory management approaches that you may encounter:

Manual Inventory Management

As the name suggests, this approach involves manually counting items and recording stock levels using spreadsheets or simple accounting software. While this is a cost-effective method, manual inventory management is time-consuming, prone to human errors, and not scalable for growing businesses.

Typically, only small businesses with low sales volume use this approach. Think of a sole proprietorship plumber or service technician. Chances are that their inventory is so small and static that they could get away with manual stock management. 

Periodic Inventory System

In a periodic inventory system, stock levels are checked and recorded at specific intervals (i.e., monthly or quarterly). This approach requires business owners to conduct physical inventory counts to update stock information in the system. It’s relatively simple but can lead to discrepancies due to the lag between actual stock levels and recorded data. 

The longer the gap between recording periods, the greater the risk of a discrepancy. For instance, let’s say that you counted your stock in January and were not scheduled to recount it until April 1st. Based on historical trends, you should have had enough inventory to get you through until May.

However, you experienced a huge surge in sales volume during the month of February. Since you didn’t have access to real-time inventory data, you were unaware that your inventory was dwindling and ran out of stock before your April 1st count. This example illustrates the dangers of making reorder decisions on outdated data.

Perpetual Inventory System

A perpetual inventory system continuously updates stock levels with each sale, purchase, or return, providing real-time inventory data. This system often integrates with point-of-sale (POS) systems, eCommerce platforms, and accounting software, automating stock management and reducing errors.

Perpetual systems are ideal for businesses of all sizes, especially those with high sales volumes or multiple sales channels. Many organizations use ERPs to power their perpetual inventory workflows, as these platforms include multiple modules for inventory, accounting, sales processing, and more.

Barcode Inventory System

Barcode systems use barcode scanners to track products, update inventory levels, and process transactions quickly. When barcode scanners are integrated with other inventory management technologies, they facilitate perpetual stock tracking. 

Barcode systems are the most well-known and ubiquitous point-of-sale inventory tracking method. Barcodes significantly reduce manual data entry and errors, speed up checkout processes, and simplify inventory counts. 

RFID Inventory Management System

Radiofrequency identification (RFID) systems use RFID tags and readers to track inventory. Unlike barcode systems, RFID does not require line-of-sight scanning. As a result, they allow for bulk reading of items and faster inventory processing. This technology is ideal for businesses that need to track goods through various stages of production and shipping. 

Benefits of Inventory Management Systems

Traditional inventory management systems may already be established in your business, which can make transitioning to a new one seem daunting. However, modern inventory management systems can improve your company’s bottom line and benefit your customers in the following ways:

Streamlined Supply Chains

An inventory management system plays a vital role in streamlining your supply chains by ensuring that the flow of goods from suppliers to distributors to consumers is smooth and interrupted. By automating order placements, tracking inventory levels in real time, and forecasting demand, you can avoid stockouts and overstocking. 

Optimizing inventory levels leads to more efficient order fulfillment and better space utilization. You’ll also be able to deliver reduced lead times and enhanced customer satisfaction. 

Additionally, a well-implemented IMS can facilitate better supplier relationships through timely payments and consistent communication, further enhancing the efficiency of your supply chain.

IMS doesn’t just make your supply chain faster: it makes it more resilient. With modern inventory management technology, you’ll have optimal control over stock and reordering workflows. If an unexpected challenge emerges, you’ll know just how to pivot to minimize disruptions to your business. 

Better Business Visibility

Visibility is crucial in managing a successful business, and an IMS provides comprehensive insights into every aspect of inventory management. With the right tool, you’ll be able to achieve real-time tracking of stock levels, sales, and order statuses. 

Moreover, you will have a clear view of your operations. This visibility extends across multiple channels and locations, enabling you to monitor and manage inventory no matter where you are. 

Such insights are valuable for identifying trends, spotting potential issues before they escalate, and making informed decisions that align with your company’s goals. 

Reduced Costs

Every business leader wants to reduce costs and strengthen their company’s bottom line. The best IMS technologies illuminate your entire supply chain, thereby enabling you to pinpoint and eliminate sources of waste. 

By maintaining optimal stock levels, you can minimize the costs of holding excess inventory, such as storage fees, insurance, and spoilage. Furthermore, an IMS can help you identify slow-moving or obsolete items, allowing you to implement liquidation strategies that offload dead stock.

Inventory management solutions not only reduce costs but also strengthen business liquidity. You’ll have more cash on hand to seize emerging opportunities or navigate unexpected challenges. 

Increased Efficiency

Efficiency is the name of the game in supply chain management. IMS technologies set the stage for unmatched efficiency by providing you with automation and reporting tools. You can reduce your dependence on manual inputs and accelerate key processes, such as inventory accounting, updating stock levels, and generating reports. This increase in efficiency allows your staff to focus on more dynamic tasks.

Moreover, efficient inventory management ensures that you’ve got products on hand when they are needed. This improves the speed and quality of service you provide to customers. 

Optimized Decision-Making

Manual inventory accounting processes force you to rely on outdated information and guesswork. As a result, there is a much greater risk of stockouts, overordering, and other inventory management headaches. Centralized IMS technologies like Dynamics GP provide a wealth of data that can be analyzed to inform your decision regarding inventory management.

When you combine Dynamics GP with a powerful sales tracking platform like SalesPad by Cavallo, you’ll have access to even more insights. This means faster, better, and more efficient decision-making abilities. Imagine how much more productive and profitable you’ll be when you can support every key decision with real-time data insights. 

Simplify Inventory Management with Cavallo

Inventory management is the backbone of your supply chain operations. When you excel at inventory management, you’ll maintain better control over your workflows and achieve strong, consistent profit margins. The question is, how do you overcome common inventory management challenges and modernize your IMS workflows?

The answer: SalesPad Inventory Manager. When you combine the centralized functionality of Dynamics GP with the real-time reporting capabilities of SalesPad, you’ll unlock rich insights into your supply chain. 

Don’t let poor stock visibility and manual processes keep your business from reaching its full potential. Get in touch with our team to take the first step to fail-proofing your inventory management system.