INVENTORY SYSTEM: TYPES, METHODS AND EXAMPLES - DUDAS - 2025

The inventory system is a monitoring system that reports on the amount of raw materials, supplies or finished products that are available. It ensures that the right amount of materials, with the right quality, are available in the right place at the right time.

This system is updated every time an item is sold or raw materials are used to manufacture a product, in order to know what is available for the next day. It also allows you to order products in advance, in order to have everything you need at all times.

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When people think of an inventory system, it is common to relate it to the retail industry. However, although stores require an effective inventory system in order to operate successfully, it is also used in many other types of businesses, such as manufacturing, utilities, healthcare, government, and education.

As part of the supply chain, the inventory system includes aspects such as control and supervision of purchases (both from suppliers and customers), maintenance of inventory storage, control of the quantity of products for sale and the fulfillment of orders.

Importance

An effective inventory system is an indispensable component of any retail or manufacturing operation. Its main purpose is to accurately maintain the physical count of products, supplies and materials stored in the warehouse.

Some of the most critical elements of a well-developed system are item descriptions, a numbering system, standardization of units of measure, and accurate item labeling.

Once established, the inventory system can be used to control and maintain stored goods to ensure that inventory is not lost to spoilage or theft.

Knowing when to reorder, how much to order, where to store inventory, etc. can quickly become a complicated process. As a result, many companies require an inventory management software or system, with greater capabilities than simple databases and manual formulas.

This is vital to controlling purchasing costs and meeting customer service goals. While inventory management software is a useful management tool, the key to a good system lies in the robustness of the procedures that are created.

What is an inventory control system?

An inventory control system refers to the strategies companies use to ensure they can have adequate supplies of raw materials for production and finished products for sale, while minimizing inventory costs.

Storing excess inventory is costly, because the space and financial resources invested in products can often be better utilized in other areas.

However, at the same time, having low inventories can result in costly production shutdowns or delays in order fulfillment. Inventory control systems help companies find the delicate balance between too little and too much stock.

What is it for?

Inventory control systems help track inventory and provide the data needed to control and manage it.

It is a technology solution that integrates all aspects of an organization's inventory activities, including shipping, purchasing, receiving, warehousing, turnover, tracking, and reorganization.

A good inventory control system accomplishes all of this, by taking a holistic approach to inventory and by enabling companies to use practices that optimize productivity and efficiency throughout the supply chain.

On the other hand, it maintains the correct inventory, in the correct locations, in order to meet customer expectations.

Regardless of the type of inventory control system you choose, make sure it includes a system to identify inventory items and their information, including barcode labels.

It is also important that it includes hardware tools for scanning barcode labels, a central database for all inventory, as well as the ability to analyze data, generate reports and forecast demand.

Inventory strategies

Appropriate inventory management strategies vary depending on the industry. An oil depot can store large amounts of inventory for long periods of time, allowing you to wait for demand to recover.

While oil storage is expensive and difficult, there is no risk of inventory going bad or out of specification.

However, for companies dealing in perishable goods or products whose demand is extremely time sensitive, it is not an option to accumulate inventory. Misjudging the timing or quantity of orders can be very costly.

Types

-Perpetual inventory system

With a perpetual inventory system, inventory records are continually updated, counting additions and subtractions as inventory items are received, sold, moved from one location to another, selected for consumption, and discarded.

Some organizations prefer this type of system because it provides up-to-date inventory information and better handles physical inventory counts.

The perpetual inventory system is also preferred for tracking inventory, because it continually provides accurate results when properly managed.

This type of system works best when using, together with warehouse inventory, a database with inventory quantities and shelf locations updated in real time by employees, using barcode scanners.

Challenges to overcome

There are some challenges associated with this type of system. First, this system cannot be maintained manually and requires specialized equipment and software, resulting in a higher implementation cost, especially for companies with multiple locations or warehouses.

Repeated updates and maintenance are necessary for the perpetual inventory system, which can also be expensive.

Another challenge with using this type of system is that as time passes the recorded inventory may not reflect actual inventory, because frequent physical inventory counts are not used.

The result is that inventory records are affected by errors, stolen items, or improperly scanned items, causing them to not match physical inventory counts.

-Regular inventory system

The periodic inventory system does not track inventory continuously, but rather allows organizations to know the beginning and ending inventory levels, over a certain period of time.

This system tracks inventory using physical counts. When the physical inventory is completed, the balance in the purchasing account is added to the inventory account and adjusted to match the cost of the ending inventory.

Businesses can choose to calculate the cost of ending inventory using LIFO, FIFO, or another method of inventory accounting, keeping in mind that beginning inventory is ending inventory from the previous period.

There are also some disadvantages to using a periodic inventory system. First, while the physical inventory count is being completed, normal business activities are nearly suspended. As a result, workers are able to perform physical counts in a hurry, due to time constraints.

Errors and fraud can be more frequent in this system, because there is no continuous control over the inventory. It also becomes more difficult to identify where discrepancies in inventory counts occur, because a lot of time elapses between counts.

How to implement an inventory system in a company?

-Develop a storage system

Organize products

The first thing is to organize your stored products so that you can easily access and count each item in your inventory. It is necessary to label everything so that it can be easily recognized and the materials can be placed in the right place.

The effectiveness of the inventory system depends largely on the accuracy of the count of the items to be inventoried. An incorrect count can cause accounting discrepancies, lead to overorders, and overproduction.

Storage requirements

The next thing is to calculate the physical dimensions needed to store the inventory. This could be an entire warehouse or a small closet, depending on the size of the products or materials, and the volume of sales.

Any special conditions required for storage, such as temperature or humidity control, should also be considered.

Inventory must be placed efficiently to improve its management. Each item should be located so that the one with the highest turnover is the most accessible.

Consideration should also be given to disposing of outdated items sold infrequently.

Consider a barcode system

If you have a large amount of inventory, you will need some way to track the items. The easiest way to do this is through a barcode system. If you have few types of items, you can use a visual system.

-Take inventory

Train workers

The people who work on the inventory are the most critical aspect of the system. If they are not trained or sure who should take action, the efficiency and accuracy of the management will suffer.

Employees should be trained in all aspects of the inventory system, such as what needs to be done at each point, who should do it, and how it should be documented.

Perform periodic counts

The frequency with which the inventory is taken will have a significant influence on the accuracy of the inventory system. Some types of operation will require more frequent inventory intervals than others.

It is important to focus on the most critical items first. For example, you can set high priority items as those that make up 80% of sales. Then, medium and low priority categories can be created for items with fewer sales. This will avoid wasting time counting items with low sales.

-Concile inventories

Fit the data

Inventory must be adjusted due to theft, obsolescence, deterioration, or damage. The inventory reduction will explain the difference between the physical inventory count and the inventory recorded on the books.

Separate functions

Inventory management requires both physical inventory management, such as counting and moving inventory, and administrative tasks, such as submitting documentation and corresponding accounting.

These two functions should be handled by different departments, thus reducing the risk of theft.

-Improve inventory management

Optimize inventory levels

Inventory levels must be kept at the correct level to maximize profits and reduce losses.

Keeping too much inventory increases the risk of obsolescence, damage and spoilage, while not keeping enough means losing sales opportunities.

Deploy software

Although using a spreadsheet can work for a small business, large businesses will need inventory management software.

The system can be integrated with other business software to create an integrated system and automate operations.

Methods and tools for inventory control

ABC inventory control

It is not desirable to have the same degree of control over all inventory items, as each one varies based on its annual consumption value.

Therefore, this method of inventory control is used to determine the importance of each item in the stock according to its annual consumption value. They are classified as A, B and C.

High value items are classified as "A". They generally make up 15% -25% of inventory items, representing 75% -80% of the annual consumption value. Strict control must be maintained over these items.

Category "B" is made up of items that have a lower consumer value. It is made up of 20% -30% of inventory items, representing 10% -15% of the annual consumption value. Reasonable control must be maintained on these items.

Less important items in inventory are classified as "C". It is made up of 45% -65% of inventory items, which represent 5% -15% of the annual consumption value. Due to the low value of these items, little control is maintained over them.

Three-tray method

It is based on the concept of the Kanban system, used by Japanese manufacturers, which regulates the supply of items by using a card displaying a set of specifications.

Work centers display this card when they want to pull inventory from supply trays.

All three trays, one on the plant floor, one in the warehouse, and the third in the supplier facility, are well equipped with a Kanban card to track inventory movement.

After using the inventory from the tray placed on the plant floor, it is replenished from the storage tray. Subsequently, the warehouse tray is sent to the supplier to be filled from reserved inventory. Immediately, the supplier will manufacture more inventory to fill their empty bin.

Just in time

It is a method where materials are acquired a few hours before being used. It is adopted by companies to reduce unnecessary inventory load, in case demand is less than planned inventory.

The goal of this method is to increase inventory turnover and reduce storage maintenance cost.

Therefore, it eliminates the need to carry large inventories. To reap the benefits of this method, there must be proper timing between material delivery and the manufacturing cycle.

Computerized system

This tool integrates in a single system all the functions involved in inventory management. Software of this type allows a company to control stock levels by automatically updating inventories, recording withdrawals, and reviewing balances.

Your benefits can be maximized when you integrate your inventory control system with other systems, such as accounting and sales, that help you better control inventory levels.

Fixed order quantity

In this method the maximum and minimum inventory levels are fixed. The fixed maximum inventory quantity can be automatically replenished when the inventory level reaches the minimum stock level or reorder point established.

The company must establish the maximum and minimum stock capacity, according to the storage space and the sales trend.

This method helps reduce reorder errors and efficiently manage storage capacity.

Examples

NetSuite ERP

This system is designed to have inventory control, regardless of volume or location. It allows you to meet customer service expectations or supply work orders to the warehouse.

Using its built-in tools and features, inventory can be tracked across multiple locations, as well as orders and safety stocks monitored.

Designed for medium and large companies, the solution ensures that you have a large volume of inventory to meet order demands at any time.

Zoho Inventory

What you will immediately appreciate about this inventory management system is that it is part of Zoho's suite of business productivity applications, one of the most widely used enterprise software brands.

The great advantage of Zoho Inventory over other systems is its compatibility with other Zoho productivity applications, which enables stable data migration across Zoho products.

This means that you can manage inventory, sales, human resources, and manage customer relationships, using a single platform.

QuickBooks

While QuickBooks is known to many as excellent accounting software, its inventory management tool is capable of keeping up with the best inventory management tools on the market.

Considering that businesses are in the business of selling items or services, then it makes sense that an accounting software solution might be able to manage all of these items.

First, QuickBooks takes care of updating the inventory quantities that are being bought or sold. A quick view of this feature should allow you to easily tell what is selling, then tell what needs to be reordered.

While you tend to other tasks, QuickBooks works in the background to bring inventory values ​​to the balance sheet.

References

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