What Is an Inventory System? (Including Types and Benefits)

By Indeed Editorial Team

Published 23 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A key component of conducting business for many companies effectively involves performing an inventory to track and maintain products across a supply chain. Implementing a system of inventory can help companies to streamline their daily operations, reduce costs, minimise wastage and improve customer satisfaction. Learning more about different inventory methods may interest you if you work in retail, manufacturing or distribution. In this article, we explain what an inventory system is, share why it's important, list systems that companies commonly use and provide tips to help you choose the right one for an organisation.

Related: 9 Inventory Management Interview Questions (With Answers)

What is an inventory system?

An inventory system uses hardware and software technology, processes and procedures to track stock, supplies and sales throughout a supply chain. Companies use these systems to ensure they know what items they have available, where they are in the supply chain and how to manage them. As inventories often involve movable assets, these systems are highly beneficial for keeping track of stock levels as items enter or leave the warehouse. They can also track data, such as the number of units, cost per unit, serial number, lot numbers, purchase dates and production dates.

Related: How to Perform an ABC Analysis for Inventory Management

Why are inventory systems important?

Inventory management systems are important because they're a single information source, giving companies better inventory visibility by simplifying processes and automating end-to-end business management and demand forecasting. They also offer many benefits to an organisation, including:

  • Enhancing the ability to complete sales: Using a system of inventory can help ensure you have sufficient stock to cater for demand and efficiently fulfil orders. Purchasing the right number of products can also help prevent you from over-ordering items, reduce waste and save shelf space.

  • Increasing reporting accuracy: With improved stock tracking using such a system, you can generate more accurate reports, which are beneficial to the calculation of costs and development of precise financial plans. It can also help you identify new opportunities and areas for improvement.

  • Improving customer satisfaction: By regularly recording inventory levels, you can increase order fulfilment accuracy and swiftly identify and rectify incorrect orders. This can greatly improve the overall customer experience, making customers more likely to purchase again.

  • Optimising cash flow: It's important to allocate funds wisely by stocking the right number of products for sufficient stock to fulfil orders but not too many so that the items remain on the shelf and accumulate carrying costs. In addition, accurate inventory reports can identify the best-performing products to invest in, resulting in greater profitability.

  • Reducing labour costs: An inventory management system can help you organise stock and make it easier for warehouse employees to locate specific products. This may reduce the required storage space and save valuable time, lowering costs.

  • Mitigating risks: It's not unusual to lose a certain percentage of products travelling through the supply chain. With a system providing more accurate inventory levels, it's easier to identify potential issues before they escalate, reducing damage, theft and human error costs.

  • Making reorders more efficient: Reordering products is much more efficient if you have reports that highlight the items you currently have available. Once a product falls below a certain threshold, automation can trigger a notification to replenish stock, ensuring you continue to fulfil orders.

  • Coping with fluctuating demand: Whether you're handling a demand surge or a slower sales period, accurate inventory numbers are a key part of demand forecasting. This helps to maintain sales and keeps costs manageable during seasonal fluctuations.

Related:

  • What Is an Order Management System? Including Benefits

  • How to Calculate Inventory Carrying Cost (With Examples)

Common inventory systems

How companies manage their inventory management systems may vary depending on the industry, business needs, goals and available resources. Generally, these systems fall into two categories:

Periodic systems

Companies that use periodic systems, or stock-taking approaches, count their stock at regularly defined intervals. For instance, using a typical periodic system, a company might perform a stock take once every quarter or every six months. In addition to counting all stock units available, it's common to calculate the stock's financial value and any raw materials. Companies use this periodic check-in to identify discrepancies and ensure inventory levels align with sales figures and waste reports.

While this system type may be relatively easy to implement, it's generally only suitable for small businesses with minimal inventory. Due to its highly manual nature, human error or misplaced inventory data can often occur. As stock tracking takes place periodically rather than continually, this can also lead to overstocking or understocking, which may impact the business. Hence, it's common for companies to calculate their stock more frequently using alternative methods.

Perpetual systems

A perpetual system allows companies to track everything relating to their inventory and supply chain by updating stock counts in real time. Rather than waiting for a predefined interval for a stock take, this method allows companies to generate updated stock levels and reports at the time of each transaction. In turn, perpetual systems provide companies with higher accuracy and the information to plan for future orders. Many businesses use a perpetual system to maximise accuracy in their supply chain processes.

How to choose the right inventory system

Here are some tips to help you choose the right system for an organisation:

1. Assess the organisation's business needs

First, assess the organisation's business needs by considering current inventory needs and projected growth. For instance, a larger business working with fast-moving consumer goods may have more complex inventory needs that require advanced inventory management functionalities. In comparison, a smaller business with limited inventory units may manage its stock using a simple inventory management spreadsheet. It may be helpful to make a list of frequent inventory challenges to help you determine any unique needs the organisation may have. Some questions to ask yourself when assessing an organisation's business needs include:

  • How often do you run out of inventory?

  • Are inventory levels consistent across all sales channels?

  • How easy is it to locate items in the warehouse or storage facility?

  • How frequently are products becoming damaged, misplaced or lost?

  • Do you often have understocking or overstocking situations?

  • What customer feedback do you receive about shipping times and product deliveries?

Related: What Does a Warehouse Worker Do? Role, Skills and Salary

2. Align the organisation's goals and objectives

Next, align the organisation's primary business objectives by prioritising the goals you're trying to achieve or any operational challenges you're trying to overcome. This could include lowering inventory holding costs, improving inventory tracking accuracy and developing more streamlined workflows. It could also involve shortening turnaround times, reducing loss and damages or increasing overall profitability.

Related: What Is a Supply Chain Manager?

3. Make a list of important features

Once you've established the business objectives, list the important features that can help you achieve them. It's helpful to differentiate which elements are key to help you prioritise. Common considerations include how user-friendly the system is, how many people require system access, the number of distribution channels in your sales network or any other systems or applications that require integration with your system. Additional features for consideration include:

  • inventory barcode scanning

  • real-time, perpetual inventory updating

  • advanced reporting and analytics

  • order routing across multiple warehouse locations

  • scalability for future growth

  • integrated accounting

  • integrated POS software

  • inventory demand planning and forecasting

  • system support and training resources

With your prioritised features list, use a search engine to conduct preliminary research on different systems, assessing whether they meet your criteria before requesting more information or setting up a meeting with the vendor.

4. Set an allocated budget

There's a requirement for the system to be highly functional and to stay within the budget. With a pre-determined budget, you can calculate how much implementing a system could potentially save the company each month. As system implementation costs can vary greatly depending on the features, customisation and support, having a clear idea of the functionalities you require can help you choose the most cost-effective and efficient system for the organisation.

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