It is estimated that up to 40% of the working capital in most companies is tied up in inventory. Consequently, errors in inventory management can lead to substantial losses, reaching as high as $110 million in the case of some enterprises. While issues in inventory management impact the majority of companies, most of these problems can be avoided by integrating an inventory management system into the workflow. Read a more detailed overview of these benefits below.
What is an advanced inventory management system?
An inventory management system is a systematic approach to regulating stock levels in companies, starting from acquisition to sale. This structured process enables businesses to maintain the optimal balance for their stock by tracking and controlling it. As a result, companies can meet exact customer demand without disruptions and shortages, while also avoiding costs associated with oversupply.
Some Enterprise resource planning (ERP) systems such as Microsoft Dynamics 365 Finance and Supply Chain Management are examples of advanced software suites designed for instant updates of records on inventory levels. Such integrated software solutions are available for on-premises and cloud implementation, with the latter particularly supporting real-time access to data.
Benefits of an advanced inventory management system
Inventory management systems, particularly advanced ones, can bring many advantages to companies. Some of the most notable are discussed below.
1. Stock Level Optimization
With an inventory management system, a company gains real-time visibility into inventory levels. This not only helps achieve consistency in shipments to customers but also makes a company more flexible and effective in adjusting to changing market demand.
There is a large number of solutions, aiming to automate data capturing, enhance accuracy by reducing human error, and streamline order fulfillment, some of which are already included in integrated software solutions like Microsoft Dynamics 365 Finance and Supply Chain Management mentioned earlier. Below are some popular advanced methods and tools available to manufacturers and retailers who want to enhance an inventory management system and increase transparency in their stock levels:
– Barcode and RFID Technology
To streamline updates on product movement at various points in the supply chain, many companies deploy Radio-Frequency Identification (RFID) and barcode technologies. By assigning each product an RFID tag or barcode, it can be easily scanned at any stage of the supply chain.
– IoT (Internet of Things) Sensors
IoT can be leveraged for improved inventory management in various ways. One example is monitoring warehousing conditions, including temperature and humidity, to help preserve stock and avoid wastage.
– Automated Alerts
To enable a timely response to stock changes, companies can configure their inventory management systems to receive automated notifications and alerts. These will be generated without human supervision once stock levels get close to predefined thresholds.
– Data Analytics
The implementation of the integrated inventory management system mentioned above also provides companies with access to analytical tools that can derive valuable insights from historical data. This information is critical for efficient decision-making and further improvement of the supply chain.
2. Enhanced customer satisfaction
The benefits of stock level optimization have a significant impact on order fulfillment. Enhanced visibility and accuracy streamline order processing, reducing disruptions and lead times. Simultaneously, effective monitoring of warehousing conditions helps maintain the desirable level of product quality.
Altogether, these advantages of an inventory management system contribute to increased customer satisfaction.
3. Reduced Costs and Enhanced Profits
Increased transparency of stock levels, combined with data-driven decision-making, minimizes incidents of overstocking materials required for manufacturing or final products. This, in turn, significantly reduces losses, especially for companies specializing in the production or retail of goods with short expiration dates.
At the same time, companies can effectively avoid disruptions in production or shipment by ensuring that stock is always adequate to meet demand. This is also a critical factor contributing to overall savings and business profitability.
4. Regulatory Compliance
A robust inventory management system offers convenient ways to enable traceability. In certain industries and regions, traceability of goods and their components, or the ability to identify their origin, is compulsory. One such industry is medical electronic equipment manufacturing, which requires the possibility to track all components used in production. Failing to ensure traceability not only imposes safety risks but can also prevent a company from obtaining necessary certifications and introducing its products to the market.
Even if there is no such requirement in your industry, traceability can still be very useful for identifying the cause of faulty products.
The issues caused by an ineffective inventory management system
The list of risks imposed on a company that fails to implement an adequate inventory management system is rather long and includes the following problems:
- Wasted resources and time;
- Stockouts, overstock, and increased warehousing costs;
- Complications with determining optimal reorder points;
- Lack of a proper understanding of market demand;
- Inaccuracy caused by manual errors;
- Insufficient scalability for the company’s growth;
- Compliance risks causing legal issues and penalties;
- Reduced customer satisfaction;
- Challenges in supplier relationships caused by rushed or delayed orders.
Conclusions – does your company need an inventory system?
Any company willing to optimize its operations should pay particular attention to inventory management and implement an effective system. This can significantly reduce costs, leading to greater profits through improved real-time visibility, ensuring the company’s compliance with regulatory requirements, and enhancing customer satisfaction.
