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Types of Inventory Management Systems

You Should Know About
Hunter Lowe (https://www.selecthub.com/author/hunter-lowe/)

 Inventory Management (https://www.selecthub.com/category/inventory-management/)

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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
(https://selecthub.com/inventory-management-software/) 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 (https://pmo.selecthub.com/ims-report-site-vers/) to see some top performers on the
market.

Compare Top Inventory Management Software Leaders

(https://pmo.selecthub.com/ims-report-site-vers/)
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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 (https://blog.flexis.com/5-inventory-
management-stats-worth-knowing).
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.

Get our Inventory Management Software Requirements Template

(https://pmo.selecthub.com/inventory-management-requirements/)

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.
 Compare Top Inventory Management Software Leaders
(https://pmo.selecthub.com/ims-report-site-vers/)

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

Barcode Systems

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 (https://www.skunexus.com/blog/inventory-management-statistics) 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 (https://selecthub.com/inventory-management/cloud-based-inventory-management-top-
solutions/), 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 (https://pmo.selecthub.com/inventory-management-

requirements/) of your business in mind when considering a solution.

Get our Inventory Management Software Requirements Template

(https://pmo.selecthub.com/inventory-management-requirements/)

Final Thoughts
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!

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Jump-start your selection project with a free, pre-built, customizable Inventory Management Tools requirements
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