What is an inventory management system?
An inventory management system tracks purchases, keeps count of goods and supplies in stock, and reorders supplies when levels get low. More sophisticated inventory management systems can track stock location and will even predict the optimum time to reorder supplies, drawing on a variety of data, including past sales and weather forecasts.
Inventory management systems integrate with — or may potentially replace — purchasing and sales systems, and they provide tools to reconcile stock levels calculated from purchasing and sales with real-world counts taken from warehouses via barcode scanners or RFID readers.
There are small business inventory systems you can run on a single PC, bigger software suites that run on premises or in the cloud, and inventory management modules for enterprise resource planning (ERP) systems.
Inventory management vs. ERP
In tracking inventory, an inventory management system provides a subset of the functionality of an ERP system, which also takes orders from customers, bills them, places orders with suppliers, pays them, pays your staff, and reports on how your business is doing. As such, inventory management is just one of the modules in a typical ERP system. That module may be enough, depending on the size of your ERP vendor and how much they know about the market you’re in, or you may want to turn to a specialist inventory management software vendor.
The benefits of inventory management software
If your business buys and sells goods and materials, inventory management can provide an essential overview of your operations, beyond simply tracking what you’ve bought and what you’ve sold. A good inventory management system can benefit your business by ensuring that you never have to tell a customer you’re out of stock, which can hurt your sales and reputation. An inventory management system can also help minimize levels of raw materials, work in progress and finished goods, enabling your organization to avoid tying up capital in unnecessary stock and save on warehousing costs by renting just enough space and no more.
Tracking how long perishable — or fashionable — goods typically hang around in your warehouse can also save you money, enabling you to limit stocks to just what you can sell before they go out of date or out of style.
Plus, inventory management isn’t just a good idea, it’s the law: Disclosing total inventory is a financial reporting requirement in many jurisdictions.
How does inventory management software work?
At its simplest, inventory management software adds up stock as it comes in and subtracts what gets sold, stolen or discarded. To ensure you don’t run out of stock, or space to store it, the software will make forecasts about how quickly stock will go out the door, and how long it will take to get new stock in, based on past performance data, such as recent sales, seasonal sales performance, and how long it typically takes your suppliers to deliver.
More sophisticated systems can use additional factors — weather reports, store schedules, anything you can turn into a number — to fine-tune those forecasts.
Inventory management features
An inventory management system can offer a lot more functionality than simply counting your inventory, depending on how much you're willing to pay, where you're running it, and what other applications you're willing to integrate with it.
Scanning barcodes is almost a given these days, even at the corner store, allowing the software to automatically update stock levels from the point of sale. Processing RFID tags takes things to the next level, allowing you to track not just which product, but which instance of a product, has been shipped or sold.
The software may be able to generate reports on inventory variations or forecast seasonal demand, allowing you to order raw materials and plan production to maximize sales. It may also automate elements of your business, automatically reordering when stock levels run low — especially useful for irregularly selling items you don't pay much attention to — and generating purchase orders and invoices, perhaps by integrating with your accounting software.
If you take orders or prepare estimates for clients on site, you'll want remote access to your inventory so you can promise realistic delivery dates: A system with a tablet or smartphone interface is a must.
The ability to track inventory across multiple locations is important if your company has warehouses around the country or makes intra-company sales.
Finally, an inventory management system that can perform "kitting" will make it easier for you to track the whole bills of materials for a finished product, whether it's a car or just the deluxe widget kit (complete with widget, spare battery and cleaning cloth).
Inventory management offerings
It needn't cost the earth to start managing your inventory. If your needs are modest, then there are free cloud systems out there that can help.
Delivrd, for example, will manage up to 10 product lines at a single inventory location. Pay $49.99 per month to manage unlimited products at unlimited locations, or twice that to integrate it with your e-commerce or order-picking systems.
Also in the cloud, Zoho has added an inventory management module to its CRM and collaboration platform. It offers features such as kitting and automatic reordering for free, but if you want to process more than a handful of orders a week or get a centralized view of multiple warehouses, you'll have to pay anywhere from $29 per month (for 10 users and 100 online orders) to $249 per month (for unlimited users and 30,000 online orders).
There are open source systems too, typically modules within broader open source ERP systems such as OpenBravo, Apache's OFBiz, or Odoo. OpenBravo and Odoo charge for support services around their software; Apache leaves that to third parties.
Further up the scale, several major enterprise software vendors also offer inventory management for their platforms. For example, Oracle Inventory Management integrates with the company's purchasing, manufacturing and supply chain software, and is available in the cloud or on premises. SAP offers many inventory management functions in its sprawling ERP system, and with its move to the S/4HANA in-memory platform much of that inventory analysis can be performed in real time.
AI in inventory management
Predictably, artificial intelligence is being used to enhance predictions or check that inventory records match reality. It’s being used to spot trends in what sells when, identifying the perfect weather for barbecue, and to improve inspection of goods in, ensuring orders match deliveries.
For more on the use of AI in inventory management, see “How AI will revolutionize inventory management.”
IoT in inventory management
Inventory management is fertile territory for the internet of things (IoT) to grow. Goods are now routinely tagged with RFID, allowing machines to track not only how much stock is on hand but where it is with ever-increasing precision. But the falling cost of sensors is making it easier to record not just where something is, but at what temperature it’s been stored and how hard it’s been dropped, at an increasingly granular level.
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