Inventory Management System Basics

The key to an efficient and profitable business is total visibility into the inventory process from start to finish, along with management tools to help you maintain optimal stock levels year-round. An effective inventory management system helps you streamline all the moving parts of your warehouse—from recommending optimal stock levels all the way to keeping your supply chain organized and running smoothly.

Learn the basics of inventory management and discover how an inventory management system can help you increase profitability and reduce waste.

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How inefficient inventory management puts you at a disadvantage

Inventory is usually one of the largest assets a company owns, which is why inventory mismanagement is one of the top reasons small businesses fail.

Inefficient asset inventory management can decrease your profitability in several ways:

Too much stock. Having more stock on hand than you need can cost you. You pay for more warehouse space, which is expensive, and perishable items can spoil before you’re able to sell them.
Longer lead time. Staying ahead of the curve on retail trends helps you capitalize on the popular items customers want at the moment. If you’re slow to adapt to the changing market, however, customers will look elsewhere and you’ll surrender market share.
Too little stock. Customers will order from somewhere else if you don’t have what they want in stock. At the very least, stockouts will cost you sales. If they happen often, you’ll lose customers.

The benefits of effective asset inventory management

Investing in an inventory management system can yield excellent ROI. Not only does an inventory management system make it easier to get your products to the customers who want them, it can provide valuable insights so that you’re ordering the right inventory at the right time and in the right quantities.

Here are some examples of how investing in inventory management pays off:

Cutting costs

Order inventory in the right quantities at the right time so that you’re never over- or under-stocked.

Maximizing labor

More productivity and less time wasted looking for missing items or tracking things by hand.

Saving space

Well-managed stock leads to more efficient and organized warehouses.

Happier customers

Orders ship faster and are more accurate, leading to satisfied customers and upheld service level agreements.

The close relationship between inventory and accounting

Inventory is considered a business asset, so inventory management ties in closely with accounting. When inventory and accounting are integrated well, you get real-time metrics into your goods at every step of the process.

Your inventory management system should support multiple inventory valuation methods and functions such as:

Inventory turnover rate

The cost of goods sold divided by average inventory on hand.

Low turnover rate indicates duplicate orders and deteriorating inventory value.
High turnover rate can mean excess shipping costs to quickly replace things that are out of stock, incomplete orders, and wasted time trying to locate missing items.
Balanced turnover rate indicates high efficiency, lower costs, and higher customer satisfaction.

Weighted average costing

The cost of available goods for sale divided by the number of units for sale. This metric yields the weighted average cost per unit.

Standard costing

Estimate of the expected cost for an item in the accounting records, which is periodically checked against the actual cost. The variance between the two numbers is recorded in the accounting records. This method is used when it’s too time-consuming to track actual costs in real time.

Bill of materials (BOM)

Refers to the list of sub-items that make up a single inventory item.

Kitting

Bundling the parts and items that make up a single finished item.

Just in time (JIT) inventory

A logistics term that refers to receiving inventory just before or at the exact time it’s needed.

Work in progress

Tracks inventory from manufacturing to when it’s used on the production shop or factory floor.

What inventory management software is, and how it can help

Inventory management software tracks, manages, and organizes inventory levels, orders, sales, and deliveries. The purpose of inventory management software is to maintain an optimal inventory level, track goods during transport between locations, receive new items, manage warehouse processes such as picking, packing, and shipping, prevent product obsolescence and spoilage, and ensure your products are never out of stock.

Software for inventory management automates what used to be a time-consuming, manual process of counting each item one by one and recording it on paper. Digitizing this process not only makes it more accurate, it saves valuable time.

Core capabilities include inventory optimization, product identification and tracking, service management for service-oriented companies, asset tracking, and reorder points. Inventory management software can provide accurate data on inventory conditions in real time, and also give you insights into trends so that you can respond to changing market demands and conditions without losing out on sales opportunities.

What to look for in software for inventory management

Inventory management software is usually part of a larger enterprise resource planning (ERP) system. If done well, that ERP unifies inventory, accounting, point-of-sale, and supply chain management on one cohesive and efficient platform.

When considering inventory management software either as an add-on or as part of an ERP solution, here are some factors to consider:

Integration. Inventory management software isn’t nearly as effective if it’s not tightly integrated with your other front- and back-end business applications.
Analytics and visibility. Cloud-based inventory management software gives businesses the ability to track inventory in real time, generate reports for improved insights and collaboration, and access the data anytime, anywhere using mobile devices.
Expense. Inventory management solutions vary widely in their features and capabilities, and so do their price tags. When shopping for a solution, it’s important to make sure that not only is the solution affordable now, but that it will remain affordable as your business expands in the future.
Tracking capabilities. Does the inventory management software track inventory in a way that makes sense for your business? For example, if your business uses barcodes, does the inventory management software offer support and integration with the scanners you use?
Deployment and maintenance. Deploying and maintaining a cloud inventory management system is faster and easier than an on-premises solution. Cloud-based solutions update automatically and provide enhanced security features, whereas on-premises solutions can be cumbersome and time-consuming to update and possibly vulnerable to attacks unless extra precautions are taken.
AI. Built-in artificial intelligence capabilities provide data-based recommendations for inventory levels, predict trends to help you stay ahead of the curve, and help you address emerging issues before they become larger problems.

Learn more about ERP

Hickory Farms takes inventory management to the cloud

Hickory Farms does nearly all their business during a two-month window each year, when their workforce swells by 4,500 people each November and December. Discover how Microsoft Dynamics 365 gives them real-time visibility into their entire supply chain and helps them make the most of their busy season each year.

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Optimize inventory management with Dynamics 365

Gain real-time visibility into repair and maintenance inventory down to the truck level with Dynamics 365 Field Service.

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Automate and streamline your supply chain with Dynamics 365 Supply Chain Management. Monitor and synchronize logistics across all facilities and warehouses, improve order fulfillment, and get AI-driven predictive insights to help you quickly identify issues.