Inventory System Management (Techniques, Benefits and Software)

Alt: = "man taking stock of inventory with inventory software on a tablet"

What is Inventory

Inventory are idle goods or materials that are waiting to be used or dispatched. Inventory can also be assets, work tools and equipment.

What is Inventory Management

Inventory management seeks to determine when it is necessary to stock physical goods or commodities for the purpose of satisfying demand over a specified time period at the right place, costs and prices.

Why Inventory Management?

Inventory management aims at knowing how much of the commodity to order for, and when to make the order to avoid overstock and understock, and to prevent knock-on effects. Inventory overstock requires higher invested capital per unit time but less frequent occurrence of shortages and placement of orders. While inventory understock decreases the invested capital per unit time but increases the frequency of ordering as well as the risk of running out of stock. Lack of transparency and accuracy in tracking and managing of inventory lead to knock-on effects. Losses in production, sales, customers, business reputation are all knock-on effects which are as a result poor inventory management system.

Importance of Efficient Inventory Management

To protect against uncertainties and to be able to meet anticipated demand for production or distributor and / or retailers.

To provide a buffer between production stages especially in work-in-progress stocks, which may effectively disrupt operations.

To take advantage of bulk-purchase discount.

To meet up with emergency shortages due to unforeseen circumstances like strikes, breakdown of plants, network system failures etc.

As a deliberate investment policy particularly in times of inflation, possible shortages, seasonal purchases.

Early problem detection

To satisfy customers and maintain customers goodwill

Theft and loss reduction

Cost of Inventory

Inventory has its costs, therefore there is need to adopt efficient and effective inventory management system.

Inventory costs are the total cost of holding stock. These costs are classified in to three:

1. Carrying, storage or holding cost. This include Cost of capital tied up in inventory, storage overhead costs, store cost (staffing, equipment maintenance), insurance, security, depreciation or breakages

2. Ordering cost. They include: the clerical and administrative costs, shipment cost

3. Stock-out or shortage penalty cost. These are suffered as a result of running out of stock. They include: loss of construction through the lost sales caused by stock out, loss of future sales as customers may go else and may not return, loss of customers goodwill, extra costs associated with urgent replenishment purchase.

Definition of Some Terms

Lead time: it is the time between placing of an order and the it receipt in the inventory system

Lead time demand: This is the number of unit of items demanded during the lead time period

Safety stock: inventory maintained in order to reduce the number the number of or prevent stock out resulting from higher than expected demand.

Dead stock: items that have never been sold or used. It can also mean obsolete stock

EOQ: EOQ which stands for economic order quantity is the order quantity that minimizes the annual holding cost plus the annual ordering cost in the system which will minimize total cost and determine the optimal quantity of commodity to order for, and when best to make the order.

Landing cost: it includes the costs of shipping, storing, import fees, duties taxes, and other expenditure related to buying and transporting the inventory.

Inventory Control System

Inventory control system is the mechanism put in place to track all stock, and determine when to order, optimum quantity of commodity to order.

There are three major inventory control management systems

Re-order level system

Periodic review system

Perpetual inventory system

Re-order Level System

This system is commonly used to set a fixed quantity of stock for each item (normally the EOQ) which is ordered every time the level of stock reaches or falls bellow the calculated re-order level. This system, which is Kore responsive to fluctuations in demand compared with periodic review system, sets the value of three important levels of stock as either warning or action triggers for management. The three important levels of stock are:

Re-order level (LRo) = maximum usage (per period) x maximum lead time(in period).

Minimum level (Lmin) = Re-order level – (normal usage average lead time)

Maximum level (Lmax) = Re-order level + EOQ (minimum usage x minimum lead time

Periodic Review System

Applying Periodic review system  means setting a review for each stock item at the end of which the stock level of item is brought up to a predetermined value. 

The two major merits of inventory control system are:

There is little or no chance of stock becoming obsolete since it is reviewed periodically.

Cost could be saved and profit increased when many items are ordered at the same time or in the same sequence.

Read also: Top 12 Inventory Management Software System

Inventory Management Techniques

Cycle counts


Surplus inventory and dead stock

Safety stock

Consignment inventory


KPI analysis

Returned inventory

ABC Analysis

Manual and Low-tech Inventory System Management

Alt: = "man taking record of inventory with paper, pen and calculator"

Small businesses use manual and low-tech solutions in their inventory management. This system involving manual recording of stocks using pen and paper, and in some cases use electronic calculator. Sales and deliveries are recorded as the happen, and the books are consulted when need arises for decision making. The advantage of this system is that it is simple to apply and it’s cheap. But then, human errors can lead to significant losses, and it’s time-consuming especially when larger inventory of stocks or assets are involved.

Inventory Management Software System

Alt: = "invenstory management system software"

For effective and efficient inventory management system, software solutions are in use today, and there are several of them in the market. Inventory system management is a critical component of business management and plays important roles in business success, there is therefore need to adopt inventory management software in inventory management.

Advantages of Inventory Management Software

Some of the advantages of using inventory management system software are:

Real-time updating of stock levels

Automated low stock, re-order level notifications

Asset tracking 

Accurate records keeping

We have compiled and reviewed list of 25 best inventory system management software tools

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