Sophisticated inventory management systems can revolutionize the efficiency of the flow of goods and materials through your supply chain.

July 14, 2022
By Taulia
By Taulia

Inventory management is the term used to describe the approach an organization takes to source, store, track, and sell inventory. It’s an important activity for businesses – and particularly for large organizations that handle significant amounts of inventory – because it influences the broader processes of procurement and sales.

For companies that have large volumes of inventory, it is usually advisable to use a dedicated system to manage inventory. While this type of solution might be overkill for small businesses with low order rates, it’s likely to be essential for larger businesses who have significant procurement needs.

Inventory management systems are designed to help these larger organizations manage their inventory control more effectively. But they vary considerably in their approach and functionality, so before adopting a new solution you should first take the time to understand the types available to you and the possible benefits they offer.

We’re here to provide an overview of inventory management systems, a summary of how exactly they work, and a guide to what you can gain from implementing one in your business.

What is an inventory management system?

Simply put, an inventory management system is a software solution or set of processes that businesses use to track their inventory as it moves through the supply chain. It typically covers the journey inventory takes, from the purchase of goods or raw materials to production and eventual sale.

An inventory management system can be used to manage all the different types of inventory that companies handle, including raw materials, unfinished goods, finished goods and packing material. For example, an inventory management system can be used to identify when raw materials need to be ordered, address issues such as surplus inventory, and speed up stock picking time.

Beyond helping to build visibility of the movement of goods and materials through the supply chain, inventory management can also be used to pinpoint inefficiencies in the process and help businesses align their approach to inventory with their cash flow needs.

Periodic vs perpetual inventory management

When talking about inventory management, it’s important to distinguish between the two different main approaches: periodic inventory systems and perpetual inventory systems:

  • Periodic inventory systems enable companies to track their inventory at the beginning and end of an accounting period. This typically involves carrying out a physical stock check to measure inventory levels at regular intervals and is therefore a time-consuming approach that is usually only suitable for companies with smaller volumes of inventory.
  • Perpetual inventory systems track changes to inventory and the flow of goods and materials through the supply chain on an ongoing basis. Stock levels are updated in real-time when products are sold, with inventory data managed through a central digital repository. Perpetual inventory is likely to be the most suitable approach for companies that handle a lot of inventory and need ongoing visibility of where inventory is up to in the supply chain.

How does an inventory management system work?

Inventory management systems can take a range of different forms and work in different ways, from manual paper-based systems to sophisticated partly automated digital solutions that can offer a wide range of functionality.

Digital solutions typically include full inventory tracking throughout the supply chain. Goods can be tracked at every stage of the process, from origination to the ultimate destination warehouse, always providing clear visibility over the status of inventory.

They will also often incorporate additional features that help businesses to adjust their approach to inventory management to suit their broader objectives. This can include ownership of goods-in-transit or at a nearby warehouse, offering the opportunity to improve supply chain elasticity and easily align the arrival of goods with demand.

In addition, some more sophisticated inventory management solutions (such as Taulia’s) provide an attractive alternative to Vendor Managed Inventory (VMI), enabling suppliers to take part in a buyer’s VMI program by outsourcing the requirements to the software provider.

Benefits of an inventory management system

Inventory management systems can provide numerous benefits that extend beyond the realm of inventory management itself, as the process inherently affects other parts of the business. Some of the most important benefits include:

Inventory visibility

An inventory management system can provide more visibility over the location and status of goods and materials at different points in the supply chain. This can help you to make better decisions, forecast future demand more effectively, and reduce the risk of overselling to maintain your ability to fulfill orders.

Supply chain efficiency

With more visibility over your goods and materials, you’re able to identify inefficiencies at various stages in the supply chain more effectively. These can then be ironed out by implementing inventory management process improvements resulting in benefits like reduced lead times and more effective preparation for future fluctuations in demand.

Lower costs/waste

By gaining perpetual insights into inventory levels, you can optimize the way that you approach inventory management. This, in turn, means you can reduce the amount of inventory you need to keep on-hand, reducing warehousing costs and limiting wastage. It also means you can improve your working capital position and free up cash to invest in growth.

Improved supplier relationships

Inventory management systems can help you achieve more reliable buying practices in a number of ways. They provide more clarity over where goods and materials are positioned within the supply chain and can provide you with simplified access to features like VMI and just-in-time delivery. What’s more, their ability to smooth out the flow of inventory through the supply chain can reduce the need to communicate with suppliers, minimize complaints, and lead to stronger overall supplier relationships.

How to implement an inventory management system

So far, so good – but how can you go about implementing an inventory management system? Naturally, it’s essential to choose the right system for the needs of your business, which will partly be determined by the company’s size and complexity. Taulia Inventory Management, for example, is a robust solution for enterprise level inventory management.

But that’s not all. It’s also important to get the implementation process right and build a strong foundation for your chosen solution – for example, by making sure you have a reliable process for accurate stock counts. This may also be a suitable opportunity to review your stock locations.

Once your new inventory management software is up and running, you’ll also need to provide training for all stakeholders. By making sure the relevant people are fully aware of how to use the system, you can minimize the likelihood of human error which could otherwise lead to inventory management problems.

Finally, establish a set of inventory management KPIs, such as average inventory, holding costs and lead times. By managing your KPIs, you’ll be able to monitor the performance of your new system on an ongoing basis and identify any inefficiencies that might arise in the future.