Differences Between Inventory Systems in Retail, Manufacturing and Distribution

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Today, almost all businesses make use of stock control and inventory systems. The movement and management of resources plays a big part in the smooth functioning of retail stores, warehouses, wholesalers, distribution companies and more. After all, if you don’t know how much you’ve got, you won’t know how much money it’ll make.

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Often, the challenge lies in picking the right inventory systems. Businesses come in a huge range of shapes and sizes, so there has to be a method for everyone. From the most basic “count and record” strategies to sprawling software architectures, keeping track of your goods is a top priority.

The efficiency of your stock system directly correlates with revenue, turnaround times and customer satisfaction. With the right inventory management software, it becomes easier not just to count items, but also to make predictions for the future. If you know how many products are bought on every day of the year, you can start to pre-empt market demand.

This is a major advantage, as knowing what to expect helps avoid wasteful spending and makes sure you always have enough resources on hand. The question is: which inventory systems are right for your business? Is it best to keep things simple? Or, could you benefit from an upgrade to faster, stronger management solutions?

Two Types of Inventory Accounting

According to established accounting principles, there are two types of inventory systems. Those types are periodic and perpetual inventory. It’s important to understand that, while both are valid and viable, periodic accounting is actually quite uncommon these days.

Periodic accounting is based on the simplest method of all. Every time an item is removed or added to stock, a manual note is created. After a certain point (for instance, at the end of every working day), the notes are reviewed and inventory is adjusted to reflect the record. This is the kind of system that retail stores would have used before the introduction of scanners and computers.

Perpetual inventory does the same job, in the same way. The difference is that notes and records are being adjusted all the time. With automated scanning technologies, there’s almost no manual intervention. Operators scan the barcode and, depending on the nature of the transaction, inventory numbers are increased or reduced.

Picking the Right Method for Stock Counting

It’s a fair bet, then, that your company needs a perpetual system. However, the precise method and model is influenced by the nature of the industry. Retailers, manufacturers and distributors tend to benefit from different kinds of stock control. There are four common options, and finding the right one requires a close understanding of your operational needs.

Minimums and Maximums

This is one of the simplest inventory systems where the director of stock picks minimum and maximum allowable amounts. These are the parameters in between which inventory should always remain. If you work with management software, you can set automatic alerts. As soon as the number of items hits the maximum or minimum, a warning notice is delivered.

You can then order more products, or cancel an upcoming order if you’ve already reached maximum amounts. This system is ideal for retailers that sell a large number of low ticket items. It also suits manufacturers that depend on lots of small, inexpensive parts to create a higher value product. You’ll also find it a quick and efficient method for perishable goods.

Two Bins

With the two bin system, the business keeps two separate collections of stock. The first is the standard “go-to-inventory” that’s used to fulfill customer orders. The second is a kind of backup inventory, and it only gets used if the first collection is depleted. It should be noted that the secondary stockpile is only used until the first is replenished.

Therefore, the secondary stockpile depletes at a much slower rate. It needs to be refilled eventually, but it’s the primary stockpile that gets the most attention. The secondary bin is only there as an emergency measure, so you don’t have to refuse customers when items run low. This system is helpful for dealing with sporadic, inconsistent or unpredictable levels of demand.

ABC Analysis

This method sees stock divided into three categories, based on value, size or both. For instance, one category might be for the cheapest parts and products. The second could be for medium-priced or sized items. The third category would be for your priciest, largest or most valuable goods. The goal is to make stocking and reordering as efficient as possible.

ABC analysis sounds like a complex method, but it gives larger businesses more control over spending. If all of your products are similar in value, a basic system of minimums and maximums might be sufficient. However, if you’re handling a variety of items, automatic restocking could lead to wasteful purchase orders.

Order Cycling

Order cycling differs from the other three methods because it doesn’t involve perpetual or constant changes. It’s a kind of periodic stock system, so it carries a higher risk of errors and shortages. Some warehouses continue to use it, but most have started to phase it out and transition to perpetual inventory counts.

Order cycling uses scanners and computers to take counts, as normal, but the record is only engaged periodically. This might be once per week or month, for instance. The warehouse manager checks the automated log and calculates how many new products are needed to fulfill all orders until the next check. This system is better left for large, slow-selling items.

The Future of Inventory Management

Automation is already a major feature of modern stock control systems. However, we’re likely to see its influence increase further as warehouses introduce things like robotics and augmented environments. At the moment, inventory management software still depends on human intervention and, therefore, human accuracy.

As jobs like picking, packing and processing get taken over by machines, their efficiency will increase. Plus, with the addition of Big Data and business intelligence, it’ll soon be possible to make advanced predictions about not just what will sell tomorrow, but what will sell next year, and three years after that.

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