Design an Effective Inventory Management System

Published On May 23, 2019 | By Lisa Patterson | Software

Employing an inventory control system has two purposes, the first is that its primary function is to make sure that a small business will be able to meet customer needs – that is, products are going to be available when customers want them. Also, having an inventory management software in place can also strengthen inventory control thereby helping in maximizing profits for a small business owner while reducing the potential from theft and loss.

For large firms like Walmart, they maximize profits by using supply-chain or just-in-time inventory control methods. For small businesses, they can use a mixture of technology, proper accounting and effective operation to ensure that there is always enough inventory available for customers while having to avoid costly overstock problems.

Here are some things that should be considered in the design of an inventory management software:

  • Be able to determine customer needs

This aspect determines how much product your customers are buying, and how much you expect them to buy in the near future. You can use a method called “forecasting” so that you will be able to determine what your customers are likely to buy in next days, week, month and year. You can use previous months’ data as the basis for your forecast. Although forecasts are never 100% accurate, having to plan an amount of “safety” inventory on hand to cover potential shortages. A safety lead time should also be included in the plan so that you will be able to have your inventory delivered quickly to be able to meet increased customer demand if the supplier is close enough, or the delivery system is quick enough for you to allow that method.  

  • Determine whether to stock the inventory or not

By having your inventory forecast based on your customer needs, you will need to establish an approved stock list for every warehouse that you use. You will also have to determine whether you will have to warehouse the inventory at your business or employ companies that specialize in holding and shipping inventory. For small businesses, they often order unnecessary stocks that tend to sit dormant in the warehouse, this will result in an increased cost and decreased profits. Thus, before adding inventory, the business should first obtain a customer commitment to purchase particular items. You can use drop shippers or those who will warehouse items and deliver them directly to customers without having to ship the items to your business. This can be an effective means of reducing inventory- holding costs. In reducing potential theft, you can do this by restricting access to your warehouse to employees who are directly involved in moving the merchandise.  

  • Determine the inventory management method your business is going to use

A popular inventory management method is the first in, first out or the FIFO method which involves selling the oldest items first, or those products which have been in the warehouse the longest, first. The FIFO method will lead the business to higher profits in an inflationary period because you are selling goods that theoretically cost you less when you purchased them at current, inflated, prices. However, in a deflationary period, the effect would be the opposite. Therefore, using the last in, first out or the LIFO method would be more desirable if the items that you have received more recently are perishable or time-sensitive. You can use a weighted average if you have relatively few items to sell because, in this method, you can recalculate the inventory cost of your entire remaining inventory every time you sell one item.

  • Keep track of the quantity and cost of items on hand

The business should be able to keep track of the exact quantity and amount of the inventory on hand, including how much of the inventory comes in and goes out every day. If you plan to do this manually, you must have a relatively small amount of items in your inventory. But, of course, the most efficient way of handling inventory is to use available technology to help you keep track of your inventory. To illustrate, using bar code printers can create labels that list product numbers that you can attach to every item. Barcode scanner will then let you swiftly scan the product item numbers, while those small handheld computers will let workers quickly input the inventory information. The inventory information is then transmitted to a computer where the inventory-control software tracks the disposition of every inventory item.  

Observing just-in-time shipping can help a business in substantially reducing its costs by timing the arrival of the inventory to just before the customer is likely to buy the item. Some big-box retailers are using this method to great effect. For small businesses, however, they might not have the funds to buy and use expensive inventory-tracking products. But, these small businesses can opt to use methods like forecasting, barcoding inventory management and drop the shipping in order to achieve the same cost-saving results that large firms are gaining with their just-in-time inventory management.  

Indeed there is a tremendous benefit to the business when they start to embrace digital transformation. This will require an investment on part of the organization, but ultimately, there are countless benefits when a business will adopt an inventory management software to monitor its inventories. Some of the benefits include:

  • Maximization of profits. This is because the company can now better decide which stock they should boost, which stock they should lessen or stop selling so that the business will be able to maximize profits and minimize losses.
  • The movement has a better audit trail. This is because the movement of the stocks can now be properly monitored like who sent it, who approved it, and who received the items.
  • Out of stock can now be avoided. By having an inventory management software installed, the company will now be notified with what branch or outlet is about to run out of supplies so that those inventory items will be supplied early on and also maintain high customer satisfaction.
  • Your business partners around the world can be able to monitor your stocks thereby saving you a huge amount of time in reporting because they will be able to see the reports anytime, anywhere from their device.

 

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