Maintaining a healthy supply chain is a difficult task that involves multiple processes and industries. A solid inventory management strategy is critical to the health of a successful supply chain and will affect how the business in question operates on a daily basis. With multiple types of inventory management systems and best practices, how does a company choose the right fit?
Before jumping into the most popular types of inventory management, there are a few things to consider. Different groups, obviously, deal with different types of inventory that inform how their operations work. Not only that, but once an overarching strategy is chosen, there are inventory management systems within those strategies that require consideration. If you are already well-off on your journey to finding an inventory management solution, take a look at our comparison guide to see some top performers on the market.
As we dive deeper, we will discuss how adopting an inventory management system plays a role, but first, let’s get oriented. So, let’s start off easy and begin with a quick definition of inventory management as a whole.
What Is Inventory Management?
Inventory management deals with the processes that go into ordering, storing and profiting from goods traveling down the supply chain from manufacturer to customer. This sounds simple, but there are many critical daily processes that go into maintaining an organized and efficient inventory. Keeping a balanced equilibrium between all the moving parts of a storage system is difficult. In fact, a normal retail establishment’s inventory is only accurate about 63% of the time.
Combatting statistics like this requires a well thought out inventory management strategy and software platform. Depending on the firm, the items they store, the regulations they have to follow and the size of their operation, they may require multiple plans and systems to keep things running. Let’s start with some of the different types of inventory and how they can affect formulating a storage strategy.
Types of Inventory
While the main focus of this article is the different types of inventory management out there, it can be helpful to think about what type of product needs to be stored first. For example, a business that operates within the medical sector has vastly different regulations and compliances to uphold than a company that sells something like clothes. Clothing requires its own set of rules, but nothing to the stringent level of storing and shipping medical supplies or equipment.
There are a few types of inventory that companies of all shapes and sizes deal with at varying points:
- Raw Materials – Items used by manufacturers to create components, subassemblies or finished products
- Work-In-Process – All materials or parts waiting to be processed by the system
- Finished Goods – An item or part that is ready for a customer to order
- Transit Inventory – Items that need to be transported from one location to another
- Buffer Inventory – An inventory cushion used to protect against changing demand
- Anticipation Inventory – Excess inventory kept in anticipation of demand rising for a specific product
- Decoupling Inventory – Important parts kept in excess to quickly repair and maintain production equipment
- Cycle Inventory – Sometimes called lot-sized inventories. excess materials held to reach inventory minimization point to lower costs
Most businesses will deal with these types of inventory as they grow and attempt to meet changing demands in the market. Utilizing varying types of inventory management strategies will involve ordering and keeping stock in accordance with these types of storage practices.
Two Types of Inventory Management
Boiling down the types of inventory management strategies results in two popular methods many groups use today. In order to remain competitive, organizations need accurate knowledge of their inventory. Without knowing what is in storage, making decisions about future procurement and distribution tasks can be difficult or even impossible. An all-encompassing strategy is needed when dealing with how, where and when to place inventory. The two most popular strategies are the periodic and perpetual inventory methods:
Periodic Inventory Management
As you may be able to tell, the periodic and perpetual methods have to do with when inventory data is entered into the system. In this case, inventory data is uploaded at a certain point, usually after about a year. Many smaller organizations employ this method of inventory management as they tend to have an easier time maintaining small amounts of product. Physical counts are easy and estimations tallying their cost-of-goods-sold aren’t as complex as larger operations. However, there are some drawbacks to this method:
- Does not provide information on costs of sold goods or ending inventory balances during periods where a count does not occur
- Cost of goods sold must be estimated during periods where a count does not occur. This may require significant adjustments when a complete count happens
- Obsolete inventory and scrap losses cannot be accounted for during countless periods and will require a significant adjustment when a count occurs
While there are a few drawbacks to the periodic method of inventory management, many companies do not have to spend as much upfront. Again, this strategy is more suited for smaller groups that don’t have to worry about large cycle counts in order to stay on top of their inventory management practices. On the other side of the spectrum, we have the perpetual method:
Perpetual Inventory Management
This type of inventory management, as the name implies, continually updates inventory records. One of the advantages of this management style is that it provides up-to-date inventory level information as well as lowering the number of physical counts needed. If inventory records are continually updated, then employees don’t need to repeatedly check on stock levels, saving time and money in the process.
However, when considering this method of inventory management companies must also keep in mind the technology they have available. An organization needs to have a strong inventory management system in place, along with a few other sub-systems to make this method efficient. Requiring these technological inclusions comes with a number of benefits. However, there are some downsides to consider:
- This type of system relies on specialized software and equipment, which can add a high price tag to maintaining the business.
- These systems require updates. Depending on the deployment of the platform, this could lead to costly downtimes when these upgrades are being implemented.
- Recorded inventory might not reflect actual inventory, and without regular physical inventory counts this could lead to discrepancies.
- Improperly scanned items, errors, and stolen goods impact inventory records and could cause inventory counts to not match up.
Now would be a good time to jump into the software side of inventory management and how it is critical for complex, perpetual based management operations.
Systems Within Systems
Jumping into a perpetual inventory management strategy requires a few technological pieces that may not be present in a smaller organization. Firstly, larger companies with big inventories need an inventory management system to help optimize their storage practices. Inventory management platforms take over many of the daily processes that go into managing stock.
One major advantage of adopting an inventory management system is the data visibility it provides. As tasks are completed, the system gathers up useful data and metrics which can then be displayed on a dashboard for consumption by employees and managers. This data allows users to discover portions of their inventory management strategies that may be suffering from issues and counteract them before they become costly problems. Managers can also leverage this data to plan for the future and make purchasing decisions based on demand information aggregated from the past.
These solutions also aid in discovering valuable connections to suppliers, which are often at the heart of any firm involved in inventory management. Some platforms even come with supplier network access built-in. Smaller organizations often benefit from this feature and can help give them a leg-up when competing with larger competition. There are many other advantages to implementing an inventory management system:
- Forecast demand
- Optimize product storage spaces
- Strengthen inventory management strategies
- Reduce errors and cut costs
- Improve accuracy and cut out manual data entry
- Increase the overall health of supply chains
Many inventory management platforms include barcoding systems as a common feature which helps organize and speed up daily tasks while boosting accuracy and efficiency. When an employee scans a product in or out, inventory levels are automatically updated. Mobile scanners are also common features included within these barcode systems, which further speeds up the scanning process. These systems come with a number of advantageous benefits:
- Automatic inventory updates
- Optimized reporting and documentation
- Efficient stock movement within and between warehouses
- Quicker transfers from picking, packing and shipping
- Speedy scanning with mobile tools
- Fewer mistakes related to manual entry
Radio Frequency Identification Systems
RFID systems are another important facet that many inventory management systems include and support. A recent study shows that RFID tagging can increase the accuracy of an inventory management operation from about 63% to 95%.
Fixed readers are used to scan items as they move about the warehouse and this data is automatically added to the inventory system. This type of RFID system is commonly referred to as active; passive RFID systems require hand-held devices, much like a barcode system. However, passive technology only has a range of 40 feet for scanning, while active has a range of about 300 feet.
There are a few downsides to RFID tagging systems that are worth mentioning:
- Much more expensive than barcode-based systems
- RFID tagging suffers from interference issues
- Transitioning into RFID can be costly as suppliers, customers and transport companies need to have the equipment available as well
- RFID tags carry more data than barcodes which can bog down unprepared servers
How to Choose a Strategy and System
Choosing the best fitting inventory management strategy and system can be a daunting task. When it comes down to selecting a periodic and perpetual method along with a barcode or RFID tagging strategy, there are a few questions users should ask themselves first.
- How big is my business?
- What kind of inventory do I work with?
- How much room in the budget is there for a new management system?
- What kind of deployment strategy should I adopt?
The last point is worth mentioning on its own. On-premise deployments are quickly losing ground to cloud-based strategies, and for good reason. Choosing the cloud comes with its own set of benefits that are hard to ignore. Firstly, many cloud-based platforms utilize subscription-based payment plans that dramatically lower the cost of entry for businesses interested in adopting an inventory management platform. This way, smaller businesses can gain access to powerful programs they may not have been able to afford in the past.
Cloud-based deployments are also painless to integrate, whereas on-premise strategies can be extremely time-consuming and expensive. This goes for updates as well, on-premise systems need to be shut down to integrate new updates while cloud-based solutions update in real-time. Security is another big win for the cloud, as operation-critical documents can be stored and recalled quickly without worrying about corruption or loss.
Make sure to keep the individual requirements of your business in mind when considering a solution.
The way a business approaches inventory management makes all the difference to the health of their full supply chain. Whether the business in question is small and laid back or large and complex, a strategy is needed to keep things moving efficiently and accurately. There are many types of inventory management software in the sea, keep your requirements in mind and you’ll find the perfect fit.
How as implementing an inventory strategy and system boosted the efficiency of your inventory management operations? Let us know with a comment below!