Business leaders expect marketing to be intricate and variable – but inventory management isn’t something many business leaders expect to have trouble with. The truth is that inventory management is a vast and convoluted field with hundreds of strategies and methods for maintaining accuracy and organization. How you track your inventory will depend largely on the type of products you stock and the tools you want to use. Here is a brief look into the extreme variety within inventory management so you can understand your options in this vast, complex field.
Different Types of Inventory
Before you can determine what types of inventory management you should employ, you must recognize that not all inventory is equal. By all accounts, there are four distinct types of inventory to consider:
- Raw materials. Your business might not deal in raw materials, but it certainly uses raw materials. For example, you might store products on pallets; if your warehouse runs out of wood to make those pallets – or if your pallet supplier runs out of wood – you might need to shut down business. Almost all businesses need some sort of system to monitor raw materials.
- Works-in-progress. If your business is involved in transforming raw materials into products, you must count in-progress inventory as well as raw materials and completed products. Knowing your works-in-progress will help you better understand your raw materials purchasing needs and your potential future profits.
- Finished goods. Even if you use distributors, you should have visibility on your quantity of finished goods. Though distributors might track how much they have in stock vs. how many sales they make, you must know how many finished products you have available to ship out to different distributors.
- Service industry. Easily the most difficult type of inventory to manage, service industry inventory is incredibly dynamic. Not only must service businesses pay attention to products like raw materials and finished goods; because services are an important element of such businesses’ sales, they must also closely monitor performance and staff.
Different Types of Systems
Once you identify what type of inventory you must manage, you can consider the common methods of management. Those familiar with inventory systems argue that there are only two management methods worth considering:
- Periodic. As you might guess, periodic inventory management requires regular reviews of inventory rather than constant visibility. The periodic method is practical for small businesses than maintain minimal quantities of inventory and lack the resources to monitor stock full time. There are a few downsides to the periodic system, such as lack of information about cost of goods sold vs. inventory balance, but it is appealing for its ease and relative lack of expense.
- Perpetual. Again, as the name suggests, perpetual inventory management requires continuous updates to records. Not only does it provide up-to-date information, but it allows deeper analysis into costs and revenues. Unfortunately, perpetual inventory monitoring does incur greater expense, either in manpower or in technology.
Different Types of Tools
Whether you choose periodic or perpetual inventory management, you should consider adopting a few tools to make the process of taking inventory easier. Keeping track of inventory manually is not only a waste of employees’ time, it is likely to cause errors which can disrupt the supply chain and anger customers. In fact, choosing the wrong system and the wrong tools can cost your business substantial amounts of time and money, potentially causing it to fail. Instead, you can take advantage of the following inventory management tools:
- Automated inventory management software. If you have a large and varied inventory – and if you use other software to make sales – you need computers to track your shipments and help you monitor inventory.
- RFID systems. Radio frequency identification (RFID) isn’t a new technology, but businesses are just discovering its uses for managing inventory. Scanners track the movement of individual items, so you always know where your products are and where they’re going.
- ABC analysis. Less a tool, more a trick, ABC analysis – or Pareto analysis – requires you to rank your inventory by value. This will help you organize your warehouse so your most often moved items are easily accessed.
- Barcodes. Among the oldest inventory tool still in use – besides pencil and paper, perhaps – barcode technology remains accurate, efficient, and intuitive. In some businesses, barcodes are being replaced with RFID, but barcodes are cheaper if more laborious.
