Inventory Management Systems

Look at any large successful retailer today and you will be astounded at the sheer numbers involved. Wal-Mart alone carries items manufactured in over 70 countries. The logistics of managing such an inventory is astounding. Other discount retailers like Wal-Mart are able to maintain low prices by using inventory management systems and sharing the information with store managers.

The goal of inventory management systems is to ensure there is always enough supply to meet demand while keeping as little stock as possible. Selling out of a product causes damaged customer relations and lost sales. Large retailers can offset these problems by offering low costs to consumers, who will keep coming back even when a store is sometimes out of stock on items they regularly buy. Smaller businesses will have less success with this strategy as they are simply not capable of securing the same bulk discounts on goods that larger retailers benefit from.

Tracking in Inventory Management

Inventory is managed primarily through tracking. Systems are put in place that monitor sales, available supply, demand and market forecasts. Businesses must be able to communicate quickly and efficiently with suppliers and central offices to keep up with the every changing demand and availability of goods.

The Human Element


A good system does not make purchasing decisions directly, but allows employees to make good decisions based on information provided by the system. This also leaves more room for human intuition in the purchasing process. Such systems provide information such as demand forecasting, and warehouse supply information. It will link employees to suppliers quickly and seamlessly. Other benefits to an inventory management system allow for strategic planning, providing sales forecasts and procuring information on raw materials and finished goods.

Some retailers avoid the need to manage inventory altogether by employing vendors to do the work. Product vendors visit a retail location, stocking and placing products. Store managers and vendors share information to maximize sales. This reciprocal arrangement is often ideal for both parties in that the retailer has no duty to track inventory and the vendor receives important feedback to use in marketing and product development.

Bar Codes and Scanners

Most businesses manage inventory through the use of bar codes and laser scanners. The barcodes represent a product identification that a computer recognizes when scanning the code. In this way, companies can count items as they come into the warehouse, are shipped off to the retailer and finally sold to a customer. This allows the retailer to know how much has come into the store, how much has been sold, and by extension, how much should remain on the shelves. This tells retailers which items are selling well and also alerts them when products need to be reordered.

The Trade Off

Whether the big discount retailers have found the best inventory strategy or not remains to be seen. There are still several good reasons for carrying safety stock. Primarily, maintaining a backup supply of goods ensures you can always  provide items to customers when they are desired, resulting in high customer satisfaction.

Time is saved as well. Lags can occur at every point along the supply chain. Safety stock compensates for these delays by preventing disruptions in the flow of products from warehouse to retailer.

Safety stock also gives businesses more certainty in planning. As demand fluctuates, they can be sure a supply remains on hand. There are also cost savings in buying large lots, so businesses are well served to purchase extra inventory to keep as safety stock.

Upcoming Technologies in Inventory Management

In coming years, expect to see more automation in respect to product tracking through the use of RFID, or radio frequency identification. This method uses a microchip to transmit the information about a product to a data collection source. Because radio waves travel in all directions, there is no need for a specific scanning point. This means a business can receive information about each item in a large shipment without ever opening the container. This will allow for greater flexibility in order consolidation and shipping for resellers. In addition, workers will no longer need to climb up on high shelves or use a lift to reach items stored high in warehouses. The method can also give specific location information to a store manager, allowing better theft protection for high-ticket items.

On the down side, RFID signals are generally frowned upon by consumer advocates who complain that the level of data transmitted infringes on their privacy. There are concerns that the data will be misused or sold to other retailers for marketing purposes on related products.

Businesses can run into problems with RFID signals, which can interfere with each other and create inaccurate readings. Still, RFID is generally becoming accepted as superior to bar codes. Such devices allow for more efficiency, more compact storage of merchandise, and swifter movement of inventories through the business. All this drives down costs for everyone, both business and consumer alike.

Heavy reliance on technology has its share of headaches. There are problems with computer crashes and software failures that can severely disrupt a company’s ability to do business. Many large discount retailers are caught off guard by unpredicted surges in sales because they rely too heavily on inventory management systems instead of keeping safety stock. This results in lost sales.

Inventory Accounting

It is also important to look at the role of inventory management systems in inventory accounting. Those who do not keep safety stock have fewer assets on the books, limiting cash flow in the business. Consider, however, that this is offset to some extent by tax savings. Therefore, the big retailers who rely heavily on technology to manage inventory justify the lost sales with the savings in taxes.

The level of reliance on technology in inventory management systems depends on the business. It is notable that this methodology is not widely used. While larger retailers have trended towards reducing or eliminating safety stock, other businesses have not adopted this model. They instead rely more on traditional methods of inventory management which include keeping a buffer stock on hand. This allows such companies to leverage the buffer stock as an asset in securing loans to increase cash flow.