05 Mar Types of Inventory Management Systems
Properly managing inventory requires a system of some sort. It doesn’t matter if the system consists of writing inventory levels on the back of an envelope or using the most sophisticated radio frequency identification system. The different types of inventory management systems all have pros and cons. For the small business deciding on an inventory management system, the choice comes down to counting inventory periodically or having a computerized system track inventory changes every time an item comes in or out of the business.
Manual Inventory Management
Many small business owners, especially if the business has very few products, keep track of inventory manually. The easiest way to perform manual inventory management is to use a spreadsheet. For example, a small bakery might use a spreadsheet to keep track of inventory purchases and usage. The owner can also set up the spreadsheet to calculate when ingredients need to be reordered.
Periodic Inventory System
Known as a periodic inventory system, employees must manually count the raw ingredients and components they have on hand at set times: daily, weekly, monthly, quaterly or annually. The more often the inventory is counted, the more accurate the system is. Employees enter the numbers in a spreadsheet. Using the appropriate spreadsheet formulas, they can determine if they have enough materials for the week or if she’ll need to purchase more.
Pros and Cons of Manual Systems
Manual systems allow the small business owner to manage inventory with very little investment in systems or training. Maintaining data integrity is a major downside to managing inventory using a spreadsheet. A single data entry or formula error can cause major inaccuracies in the data output.
Barcode Tracking Systems
Inventory management systems that use barcode technology increase the accuracy and efficiency of managing inventories. These are perpetual systems, as the inventory is updated every time an item is scanned. All major retailers use barcode technology as part of an overall inventory management program.
When a barcode gets read at the point-of-sale, inventory sales data are immediately read to a broader system that maintains usage statistics. The company’s purchasing department uses these data to make buying decisions based on sales and existing inventory levels.
Barcode Technology at the Warehouse Level
Barcodes also manage inventory at the warehouse level. Most warehouses use barcode or radio frequency identification (RFID) to scan incoming inventory into the warehouse’s inventory management or warehouse management software. Barcode technology facilitates the movement of inventory within the confines of the warehouse (from one location to another) or from the supplier to the warehouse (receiving) and from the warehouse to the customer (picking, packing and shipping).
Radio Frequency Identification
While barcode technology has done a lot to increase the accuracy and efficiency of managing inventory, radio frequency identification (RFID) has raised the bar on perpetual inventory management. Companies that use RFID typically move thousands of pieces of inventory through their doors. RFID uses two types of technology to manage inventory movements–active and passive technology.
Active RFID Technology
Active RFID technology uses fixed tag readers assigned throughout a warehouse. Anytime an item with an RFID tag passes the reader, the movement of the item is recorded in the inventory management software. Active systems work best in environments that require real-time inventory tracking or where inventory security problems exist.
Passive RFID Technology
Passive RFID technology requires the use of handheld readers to monitor inventory movement. Just as in an active system, once an inventory item’s tag is read, the movement data are transmitted to the company’s inventory management software. Because RFID technology has a reading range of up to 40 feet using passive technology and 300 feet using active technology, it greatly increases the accuracy of moving inventory around a warehouse.