operations | 7 mins read

How an Inventory Management System Can Help Your Business

how an inventory management system can help your business
Michelle Jaco

By Michelle Jaco

What is an Inventory Management System?

Inventory management is the process businesses go through to ensure their inventory is kept at the optimal level. It involves everything from buying stock to storing it, to using it in an optimal way, and finally ordering more when inventory begins to run low.

An inventory management system comprises of the tools businesses put in place to help with the above. It takes into account everything the business needs to ensure it has the correct amount of inventory available to fulfill its sales obligations while reducing costs.

For small businesses or those just starting out, an inventory management system could be as simple as a notepad and pen or an Excel spreadsheet. They could use a system like this to track inventory at the end of every day, week, or month.

If the business doesn't handle much stock, tracking goods in this way may be enough for the business owner to manage inventory and see when certain items are running low.

Other businesses, especially those that manage a larger number of goods, can use software and apps to make the management process easier. Specialized inventory management software tools provide many features that help businesses track their inventory in real-time and make better management decisions.

Larger businesses may go one step further by introducing hardware such as barcode scanners or other tracking devices. This could make the process of tracking significant amounts of stock easier.

In all cases, inventory management systems may also consider processes to use and store inventory in an optimal waysuch as labelling or warehouse organizationas well as actions employees should take to manage inventory.

Why Put an Inventory Management System in Place?

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Using an inventory management system has several benefits, all based around the effective use of goods.

The exact benefits you get will depend on the type of company you run, its size, and the type or amount of stock you deal with.

Businesses such as restaurants and supermarkets that sell a lot of perishable items may gain significant cost reduction benefits by implementing an effective inventory management system. These will come as they are able to reduce the amount of goods they waste due to passing expiry dates.

On the other hand, businesses that sell a smaller number of high-value items may benefit most from potential cash flow increases. These are brought about by more accurate sales forecasts that reduce the chance of overstocking.

Here are some of the main benefits of an inventory management system.

Reduce Waste Costs
Putting in place an effective inventory management system can help your business reduce costs brought on from waste or excess stock that you can't sell. It will do this by helping you get a better idea of how much of each item you require, allowing you to order the optimal amount.

Here's an example of this in action.

Imagine you run a restaurant. Ordering more supplies than you are likely to use will result in you having to dispose of ingredients as they reach their expiration date. The more you can cut down on waste without ever being short and losing out on sales, the less cash you will lose.

It's not just businesses that deal with items that run the risk of expiring that will benefit from better sales predictions.

An eCommerce fashion store that changes its stock depending on the season will lose money if it ends one season with a lot of unsold stock. The business will either have to keep the goods until the following year or attempt to recover some of the costs by selling them at a lower price.

Reduce Storage Costs
Reducing waste isn't the only way inventory management systems can help cut costs. Warehousing, refrigeration, and staffing costs can all add up if your business is storing way more than it otherwise needs to be.

By providing forecasts about how much stock you will need, your business can ensure it only ever keeps the optimal amount of inventory in storage.

Maximize Sales
While the above two points have focused on not having too much stock, inventory management systems also help with the opposite problem, like running out of stock.

When you out of stock, your business runs the risk of losing sales, as you are unable to fulfill demand. Inventory management systems that alert you to when stock low allows you to take action as soon as it is needed, ensuring you don't run out of items, therefore, maximizing sales.

Free Up Cash
Related to costs is the fact that having more money than is necessary stuck in inventory means this money can't be used for other business costs. For example, staffing or development.

Imagine an electronics seller that specializes in TVs. If it buys 50 units at $500 apiece to cover the following month's sales, yet only sells 25 units in the time period, it essentially has over $6000 stuck in inventory that it could have put to other uses. This is a less than an optimal way for a business to use its cash reserves.

A good inventory management system will help the owner calculate the amount of any particular item they are likely to need in a set time period. This makes them less likely to spend more than is needed on inventory, allowing them to use the money to cover other costs.

Increase Sales
An inventory management system can increase sales by reducing the chances of you being sold out of an item when a customer wants to buy it. By having a better idea of stock levels and how much you are likely to sell, you are less likely to run out of popular products.

Consider the example above. Had the business owner only bought 22 TVs, while they would have more cash available, they would have missed out on three potentially lucrative sales.

Another benefit of always having enough stock is that it means your customers will have a better experience with your business. They are less likely to be disappointed due to the item they wanted to buy being unavailable.

Improve Productivity
Inventory management systems can increase productivity by reducing the amount of time you spend managing stock. Simple inventory management systems such as spreadsheets can help you keep your inventory organized allowing you to make better decisions, quicker.

If you really want to see productivity benefits, using dedicated software can help you take things further by automatically keeping track of stock and streamlining many of the stock management processes, for example, ordering.

Features to Look for in an Inventory Management System

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There are many inventory management systems out there; just as there are many different types of business.

A large supermarket chain with multiple locations and various outlets will have very different needs to a medium-sized family restaurant with a single location. Nonetheless, most inventory management systems will have some of the following features.

Real-Time Inventory Tracking
Real-time inventory tracking allows your business to keep track of all of your stock at all times. This is especially useful for businesses with high turnover. Being able to track items in real-time allows you to see which ones are selling quickly and reorder stock before it is too late.

Systems with real-time tracking may also include alerts that tell you when a particular item is running low. By notifying you as soon as this is the case, you'll be in the best position to order more to ensure you don't miss out on sales.

Inventory Reports and Analytics
Software inventory management systems keep track of everything going in and out of your business. Those that can generate automatic reports allow business owners to get an overview of everything that is going on at their business in terms of inventory.

This will allow them to spot places where inventory management could be improved. For example, is the business losing money on waste, and if so, how can it cut down? Or, are there any types of inventory that the business is frequently undersupplied in? Having this information can empower managers to make better inventory decisions.

Performs Stock Counts
Stock counts are an essential part of the inventory management process. A strong inventory management system will enable you to take counts, helping you keep track of all your inventory. Some software will allow you to set variable count frequencies for different items while keeping each count sheet separate to prevent confusion.

Stock Projections
Inventory management systems with projections can help managers and business owners get a better idea of much stock they are likely to need in certain time frames.

Armed with this information, those in charge of purchasing stock can buy at levels that will enable them to cover anticipated demand without having too much leftover.

Integration with Other Tools
Good inventory management systems will integrate with other tools your business uses; for example, your Point-of-Sale or ordering tools. By integrating throughout your business, you'll be able to automate more procedures and can potentially get a better, more accurate overview of inventory.

Cloud-Based/Multiple Device Support
Choosing an inventory management system that is cloud-based ensures that all updates made to the system are automatically reflected across your company. This will give everyone who needs access to inventory data the most up-to-date information while reducing the chance that changes will be added to the system multiple times.

Additionally, having the system available on multiple devices, for example, smartphones, tablets, or PCs, allows managers to keep track of inventory wherever they are. This can be especially useful for smaller businesses that don't have a dedicated department.

Inventory Management Systems Can Save Your Business Money

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Reading this article, you'll have likely realized that inventory management systems can have significant time and costs saving benefits for businesses that use them effectively.

The cost benefits brought by reducing waste and dead stock while maximizing sales mean it doesn't take much for you to get a positive return on your investment, assuming the product you choose is proceed suitable for your business.

Equally, productivity savings can reduce the amount your business spends on staffing while reducing the work you have to do as a manager.