An inventory management system integrates many software programs to monitor inventory levels and activities. The system is compatible with multichannel sales and delivery platforms. It improves inventory levels while also ensuring product availability through numerous channels. It offers a centralized, real-time tracking of all goods, inventory, and orders among all sites and selling platforms. This allows firms to stock less stock and frees up capital for use in other areas of the business.
In this post, we will look at four types of inventory management systems that businesses might adopt to avoid unnecessary problems.
What Are 4 Inventory Management Systems Types?
The four major inventory management systems types are not necessarily incompatible. Depending on the kind of operations, and scale of the firms, businesses might employ a variety of systems.
Type 1: Periodic Inventory Management
It tracks inventory at the conclusion of each accounting cycle rather than on a daily basis. This might be done weekly, monthly, or annually. Inventory management software is not required for the system. Rather, all inventory is manually tallied by hand and carefully documented in journal entries.
Calculating the Cost Of Goods Sold or COGS which used the periodic inventory method is simple and looks like the below:
Companies that sell a modest number of commodities and do not need a highly precise view of their stock levels often employ periodic inventory systems. A jewelry business, for instance, that sells a small number of high-value products would adopt the periodic approach because inventory levels are simple to keep track of and maintain.
The benefit of employing a periodic inventory management system is it can be easy to set up and maintain. This makes it excellent for small enterprises that do not maintain significant inventories.
However, due to the higher likelihood of mistakes, it can be a cumbersome approach for larger enterprises that run with larger volumes of goods. Periodic systems have a historically poor track record of detecting errors and inventory losses caused by loss, damage, and theft. It also does not give up-to-date inventory levels because everything is documented manually.
Type 2: Perpetual Inventory Management
Continuous inventory management systems keep track of inventories on an ongoing basis. This implies that when things are purchased and new inventory is delivered, stock levels are automatically updated, and transactions and returns are quickly logged in your inventory accounts. Companies must employ software to utilize the perpetual system, either a POS system or an inventory management system.
The primary advantages of adopting this system are having an exact and up-to-date picture of stock levels, which allows firms to order the appropriate quantity of goods and not need to generate closing entries.
Larger firms and those with a significant percentage of inventory units often employ perpetual inventory systems. A manual inventory count is still necessary every year in order to compare actual inventory numbers to those recorded by the program.
The disadvantage of this strategy is that it needs investment in software and technologies to be carried out properly. Investing in an inventory monitoring system, on the other hand, is an expenditure that will speed the process to operate properly and save time on manually tracking organizations with big quantities of inventory.
Type 3: Barcode Inventory System
Numbers are used in barcode inventory systems to distinguish every specific product. The barcode numbers can reflect a variety of details about the object, such as the manufacturers and suppliers, the product’s position, size, the quantity of every item in inventory, and more.
There are two kinds of barcodes:
- The Universal Product Code (UPC) combines the manufacturer code with the product code. These two codes are unique codes connected with certain objects and are organized by an organization called GS1 which stands for Glocal Standard.
- Stock Keeping Unit (SKU) is stored by individual retailers to develop their own SKUs for internal inventory management. SKUs can have a lot more data than ordinary UPCs, such as store location, product classification, color, department, and dimension.
Perpetual inventory tallies are related to barcode inventory systems. Whenever an item is purchased, sold, or relocated, its barcode may be scanned into inventory management software, which subsequently changes stock levels and data automatically. The expense of barcode inventory gear and software can be acceptable for organizations with few stock items.
However, barcode inventory systems may be a great addition for firms with high stock levels because they assist decrease errors produced by manual methods and gathering the most precise and current inventory data.
Type 4: Radio Frequency Identification (RFID) Systems
RFID is a radio-frequency identification technology that employs radio waves to communicate both a tag which is a small microchip and a reading device. The tag’s data is read by the readers, which often comprises distinguishing inventory numbers or product-related details like stock and batch quantities and manufacture dates.
RFID inventory systems, in general, are more advanced barcode systems. They can read tags from up to 40 feet distant and do not necessitate line-of-sight scans. RFID systems are thus an excellent alternative for companies that manage distribution centers and warehouses with significant volumes of product and employ multi-level warehousing.
These systems frequently need a large expense in both technology and equipment. RFID tags are far more expensive than standard barcode technology and require specialized scanners.
What Are 4 Inventory Management Systems Types?
After delving into the many types of inventory management systems, it is critical to recognize the various categories of inventory. In general, inventory may be divided into four categories:
Raw materials are inventories utilized in the production of finished goods. What one firm considers a raw material may be deemed completed items by another. A corporation that manufactures components or parts for machines and equipment, for instance, would take into account such parts completed commodities. The same parts would be considered raw materials by a manufacturer who purchases them to be utilized in their production process. Raw materials can include products such as steel or paper, bolts and nuts, wheels, chemicals, and other objects.
Works-in-process, which is known as WIP, refers to any direct or indirect inventory utilized by your company to produce final items. In regards to the product’s price, WIP covers raw materials and labor expenditures that are still in process at the conclusion of the accounting cycle. Packing, for instance, is the work in progress for medical equipment until it is supplied to a consumer. Another instance is a ready-made outfit. The packing and raw materials utilized in the garment are both WIP until the outfit is sold to the buyer.
Maintenance, Repair, and Operations (MRO)
MRO is an abbreviation for maintenance, repair, and operational supplies. MRO inventory includes goods required for operation, like equipment and machine, as well as items required for maintenance infrastructure and equipment. Therefore, MRO inventory may comprise products that are often called raw materials but are basically spare components in this scenario. A nice illustration is bolts and nuts. Once bolts and nuts are used to build completed goods, they are considered raw materials. Additional bolts and nuts kept in storage by a corporation to fix machinery, on the other side, are categorized as MRO.
Finished product inventory is the simplest of all inventory kinds. Any merchandise displayed on your website or offered for sale in your business is a finished item. Thus, finished products are simply anything that is ready to sell to your clients. A completed item might be a custom-built computer or a pre-packed caesar salad, for instance.
In conclusion, there are no hard and fast rules about what types of inventory management systems a business should use, but make sure that whatever you chose helps you monitor inventory accurately instead of hindering you. Besides, don’t forget to select the appropriate inventory accounting technique to suit your inventory management system.