The different methods of inventory management

Managing inventory effectively is critical to maintaining cash flow, reducing the cost of holding stock, and being able to fulfill customers’ orders on time.

Yet many businesses overlook its importance.

Cautionary tales of failed retail giants like Toys ‘R’ Us and Target Canada teach us that poor inventory management practices can have disastrous consequences.

On the flipside, thriving brands like ZARA and Walmart demonstrate the value of effective inventory management in driving long-term profitability.

So, how can you be your own inventory management success story? In this article, we’ll cover the basics of inventory management and different ways of managing inventory, so you can choose the right approach for your business.

What is inventory management?

Inventory management is the approach a business takes to ordering, storing, and selling or using inventory. Ideal inventory management means holding the right amount of stock at the right levels to meet business needs and customer demand.

An inventory management system is a tool designed to monitor stock levels at every stage of the supply chain. This can include everything from production and ordering to warehousing, shipping, and fulfillment, as well as stock movements in between.

Who needs an inventory management system?

Simply put, every business that holds stocks can benefit from using an inventory management system. An inventory management system helps by:

• Providing full oversight of your stock levels at all times
• Enabling you to track your best-selling products
• Ensuring you have enough stock on hand to meet customer demand
• Enabling you to predict and account for future demand
• Streamlining sales and stock levels across multiple channels and/or warehouses
• Optimising order fulfillment times

As you’ll see below, different inventory management systems provide varying degrees of support. Let’s compare some of the key differences.

The 3 main types of inventory management systems

1. Inventory spreadsheets

Many businesses start off by using an inventory spreadsheet template as a basic way of tracking stock levels.

Although basic, a Google Sheets or Excel inventory template with formulas provides a quick and low-cost inventory management solution for small businesses.

Suitable for: Startups with revenue under $100,000.

Typical features:

• Basic stock level monitoring
• Basic sales monitoring
• Option to manually input inventory formulas like reorder point and inventory turnover ratio

Pros:

• Cheap
• Easy to set up
• No ‘bells and whistles’

Cons:

• Needs to be updated and monitored manually
• Basic functionality
• Prone to human error
• Data doesn’t update in real-time
• Difficult to scale up

2. Cloud-based inventory management systems

For businesses using a basic inventory spreadsheet, knowing when to reorder stock, how much to order, where to store stock, and so on, can quickly become complicated – especially as inventory levels grow.

As such, many businesses graduate to a cloud-based inventory management system that is equipped to handle more complex inventory ecosystems.

Cloud-based inventory management systems store data in the cloud (i.e. third-party servers), which means they can be accessed and updated at any time, from anywhere. They’re also specifically designed to handle the requirements of a growing business when it comes to stock, warehousing, ordering, fulfillment, and more.

Suitable for: Small-to-medium-sized businesses with revenue between $100,000 and $100m.

Typical features:

• Automated stock level updates
• Real-time inventory valuation
• Automatically calculated stock formulas
• Vendor organisation capabilities
• Product organisation capabilities including images, categories, and prices
• Reporting: best-selling items, total sales, total taxes, etc.
• Integrates with other business software, such as POS and eCommerce platforms

Pros:

• Purpose-designed to handle growing inventory management requirements
• Accessible anywhere, at any time
• Updated in real time
• Provides a single source of truth for data
• Updates happen in real time
• Lower risk of errors than spreadsheets
• End-to-end supply chain management
• Integration capabilities

Cons:

• Higher cost than spreadsheets
• Some set-up required

3. Enterprise resource planning (ERP) systems

ERP inventory management systems are designed to handle highly complex and sophisticated inventory ecosystems, which means they’re typically used by large organisations. With an ERP system, businesses can manage all their finances, logistics, operations, and inventory in one place.

Small and medium-sized businesses usually wouldn’t be able to justify the higher cost of an ERP system compared to a cloud-based inventory management system, especially if the additional functionality and capabilities aren’t needed.

Suitable for: Large businesses with revenue over $100m.

Typical features:

• Automated inventory tracking across the entire supply chain
• Integration of all enterprise resource planning requirements including inventory, purchases, sales, production and finances
• Multi-channel order fulfillment
• Warehouse management and stock transfers
• Payment gateway functionality
• Customer relationship management (CRM) functionality
• Integrated mail and SMS functionality

Pros:

• Functionality to handle complex supply chains
• Functionality to handle complex data streams
• Advanced warehouse and location management capabilities
• End-to-end supply chain management
• Integrates with other business systems

Cons:

• Significantly higher cost
• More complex set-up and training required
• Complex workflows
• Coding may be required to integrate additional systems
• Advanced functionality may not be needed

Which inventory management strategy is right for you?

Learning how to manage inventory effectively is an ongoing process. If you’re relatively new to business, you might find that Excel product tracking or a simple inventory list template suits your needs in the short-term.

However, as you generate more sales, it’s a good idea to consider a dedicated inventory management system that’s designed to handle growing businesses’ needs.

Cloud-based inventory software will give you the tools and insights you need to monitor your inventory effectively, fulfill orders on time, maintain cash flow and achieve sustainable profitability.

Interested to see how cloud-based inventory management works? QuickBooks makes it easy to handle your inventory, see what’s in stock and what’s on order. Try it free for 30 days.