Many business owners think that inventory management is a no-brainer. You just have to track the products that come in and the ones that go out, right? Unfortunately, managing your inventory isn’t that simple. It’s a difficult task that involves foresight and accuracy. Otherwise, you’d spend a huge chunk of your working capital on shipment delays, excess inventory, etc.
Having an efficient inventory management strategy is the key to having a successful supply chain. But with different types of inventory management systems, how can you choose the most suitable strategy for your business?
4 Different Types of Inventory
Before we dive into the inventory management strategies, understand that there are different types of inventory.
- MRO Goods: MRO goods pertain to maintenance, repair, and operating supplies. This type of inventory pertains to the items that are necessary for operations like equipment and machinery, raw materials, and other items needed to maintain infrastructure and equipment. Other examples of MRO inventory include janitorial supplies (mops, brooms, uniforms, gloves, cleaning solutions, etc.) and office supplies (pens, printers, ink, etc.).
- Raw Materials: Raw materials are items used to manufacture your products, like nuts and bolts, chemicals, paper, steel, and other items.
- Work-in-Progress (WIP): inventory items that go under processing, such as raw materials and other components that go through a manufacturing process to produce your finished product. Once the WIP inventory goes under processing, it becomes finished goods.
- Finished Goods: These are products that have undergone processing and are ready to be sold to final customers.
3 Types of Inventory Management Systems
Now that you know the different types of inventory, here are three different ways to manage them.
1. Manual Inventory Management System
Small businesses and startup companies that carry low levels of inventory usually track their inventory manually. With the manual inventory system, an employee goes through all your inventory, counts all the items, lists down the results, and enters the data in a spreadsheet. This method takes a lot of work, especially if your business has a lot of inventory.
2. Periodic Inventory Management
For periodic and perpetual inventory management systems, the primary difference between both systems is how often the data is entered.
With periodic inventory management, you update the inventory data after some time, either monthly, quarterly, or annually. Companies with minimal inventory often use this method because physical counting and tallying the costs of goods sold aren’t as complicated as for larger businesses with lots of inventory.
There are some disadvantages to using the periodic inventory management system:
- You can’t adjust obsolete inventory and scrap losses if you’re not tracking inventory. Once you start counting, you may have to adjust your data. This can be a hassle, not to mention expensive, on your part.
- You only get to estimate the costs of goods sold if a count is not happening. In this case, you may need to adjust the actual costs of goods sold when you complete an inventory count.
- You won’t have any information on the costs of goods sold or ending inventory balances if there hasn’t been an inventory count.
The periodic inventory management system is a form of manual inventory process. While there are a few disadvantages to using manual inventory tracking, you don’t have to spend a fortune upfront. This method is more suitable for small businesses that don’t have large cycle counts.
3. Perpetual Inventory Management System
On the other hand, the perpetual inventory management system constantly updates inventory records. This gives you up-to-date inventory data without having to do a lot of physical counts. If your inventory levels were automatically updated, your employees wouldn’t have to check on stock levels constantly.
With a perpetual inventory management system, you must purchase the appropriate technology for the job. Having these technological solutions can help you save time, allowing you to focus on other aspects of your business. However, just like the periodic system, there are some disadvantages to it:
- You’ll need to acquire specialized inventory management software or equipment. This can add to your monthly operational expenses. Fortunately, there are inventory financing options available
- that can help you with the costs associated with managing inventory.
- You may need to update the system now and then. When updates are happening, you may not be able to use the system.
- Errors in the system, stolen products, and wrongly scanned items can mess up your records.
- If you eliminate regular physical inventory counting, the chances of recorded inventory not reflecting your actual inventory may increase.
