Managing the inventory in your small business is one of the (many) keys to success. Keeping close tabs on what (and when, and how much) goes in and out of your facilities keeps things moving along nicely, allows the number crunchers in your company to help have a holistic view of the finances, and perhaps most importantly, keeping your customers satisfied. Even though the term “inventory management” sounds simple, there are several factors that go into your company’s successful inventory management system.
What is Inventory Management?
Inventory management is a series of processes, including ordering, storing and shipping the inventory of a company. Not only are the finished products included, but so are the raw materials, supplies and components that are related to completing the finished products. In addition, the warehousing, shipping and tracking and processing of all of these items are elements of inventory management.
Inventory of a company consists of several things, most commonly:
- Raw Materials: The materials and supplies required to create your product.
- Work In Progress: Products that are in the process of becoming finished goods. (See below.)
- Finished Goods: The completed products that are to be sold/shipped to customers or retailers.
- MRO Goods: MRO, an acronym for “Maintenance, Repair and Operating” supplies, are the components that are required for, as the name suggests, maintaining what is required for the equipment for producing the finished goods.
Types of Inventory Management
In short, there are basically two types of inventory management systems: perpetual inventory systems and periodic inventory systems. Both have a series of pros and cons, and depending on the size of the company, the industry, etc., one might be a better fit than the other for your company.
Perpetual Inventory System
This system tracks inventory and records this data in real time. In virtually every instance, it’s integrated with a point of sale (POS) system that is linked to enterprise asset management software. Every transaction, incoming and outgoing, is updated in real time. Of course, the greatest asset of this type of system is that accurate reports can be requested at any time, and those reports will give multiple departments (e.g., procuring, sales, accounting and customer service) the data that is necessary for them to accurately do their jobs. The downsides of a perpetual inventory system are that it often requires specialized equipment, and that can typically cost more than other types of inventory systems.
Periodic Inventory System
This system is one where an inventory is performed only at certain intervals. This could be weekly, monthly, quarterly or even annually. This method also relies on having access to the previous inventory results. In addition to being less costly than a perpetual inventory system, the periodic inventory system is best suited for smaller companies, particularly those with smaller amounts of inventory on hand, which makes a physical inventory easier and less time-consuming. The downside of a periodic inventory system is that it can slow down production and that real-time reports aren’t available, so it’s better for a “big picture” scenario and not for day-to-day decision making.
Inventory management is vital for any company because it tracks and counts the items that are often a company’s biggest expense: its inventory. It’s important because in order to keep the lights on, the ability to see how much capital is tied up in raw materials, work in progress, finished goods and MRO goods is vital for the number crunchers in the company. In addition, having a road map about what (and when) to order is important, because meeting quotas (based on sales projections) is what maintains your company, both financially and through industry goodwill.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
The Blueprint – 4 Types of Inventory Management Systems for Small Businesses
Business.org – Types of Inventory Management
Investopedia – Inventory Management