What Is an Inventory System? (With Types and Benefits)

By Indeed Editorial Team

Updated 11 October 2022

Published 5 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Managing and tracking inventory is crucial to the success of many companies. Applying a system for inventory can help companies be more organised, lower costs and increase the accuracy of their reports. If you work in retail, manufacturing or distribution, or part of your role entails managing inventory, learning more about inventory management systems can help you advance in your field. In this article, we describe what an inventory system is, explain why they're important, look at eight different systems and offer advice for choosing a suitable system for a business.

What is an inventory system?

An inventory system is a process companies use to track their stock, supplies and sales through the entire supply chain. It helps businesses to make sure they're aware of exactly how much stock they have available and where it's located. These systems track inventory from the moment of purchase to the sale of goods and provide a record of both new and returned products as they enter or leave the warehouse. Advanced inventory management systems are also able to monitor data like the number of units, serial numbers and the date of production.

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Why are inventory tracking systems important?

Inventory tracking systems are important to the health of a company because they help companies to keep an accurate record of their stock and ensure they're rarely overstocked or understocked. An inventory tracking system can also benefit you by:

  • Ensure you fulfil incoming or open orders: Using a system can help you account for stock and identify what and how much stock to order and at what time so you can make sure you have enough stock to fulfil customer orders.

  • Warn you of a potential product shortage: Keeping a record of your inventory can allow you to identify and respond to trends. It can also warn you of a potential product shortage.

  • Provide you with more accurate reports: An inventory tracking system can provide you with a more accurate overview of your stock so you can calculate cost values and develop accurate financial plans. A system can also help you identify new business opportunities and areas for improvement.

  • Improve customer satisfaction: Keeping track of your stock can help you efficiently fulfil orders, reduce delivery time and improve your customer experience. This may lead to better customer satisfaction, improved customer reviews and more brand loyalty.

  • Minimise risks: Monitoring your stock levels with an inventory management system can help you recognise any potential risks and resolve them before they become a problem. This can also help lower costs caused by theft, product loss, breakage and manual error.

  • Reduce costs: By helping you organise your stock, an inventory tracking system can make it easier for warehouse staff to locate items, saving time and reducing the amount of space you require for storage which can help lower costs.

  • Make reordering more efficient: Having reports that reflect what you currently have in stock can make reordering raw materials and products more efficient. You may implement a system that provides you with analytics to identify what products your customers buy more of so you can plan in advance.

  • Increase profit margin: A system can help ensure you buy the correct amount of products or materials. This may help you avoid ordering too much of certain items to reduce surplus and conserve storage space.

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8 types of inventory tracking systems

The way businesses manage their inventory can vary according to factors such as the industry they're in, the size of the company and their available resources. Here are eight types of systems you can use to track inventory:

1. Perpetual inventory system

A perpetual inventory system is one of the most popular systems among retailers. It enables a company to track its inventory and supply chain in real-time. Using this system, the company can update its stock level and relevant reports after each sale, delivery or breakage. This system offers highly accurate data that can help the business to prepare for future orders.

Dedicated inventory management software

There are many different options for a company looking to implement an inventory management software system to organise and monitor its supply chain. Companies that handle a large amount of inventory may appreciate some of the more advanced features of a dedicated inventory management software system, such as automated low stock notifications, barcode scanning, comprehensive analytics and reports.

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Cloud-based solution

A cloud-based solution is comparable to a dedicated inventory management system, except that instead of storing data on a computer, all of the data is stored online. This means your team can access current inventory data regardless of their location. It also enables you to automate certain tasks and add updates in real-time. This system is popular among small and medium-sized companies as it's simple to scale as the company expands.

Manual inventory management

Manual inventory management refers to when a company keeps track of its inventory manually with a pen and paper. This system is typically used by new or small companies when they begin to manage their inventory by recording all sales and deliveries in a ledger. It's a simple and low-cost system that enables companies to review their sales, order and delivery data as required.

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Inventory management spreadsheets

Using a spreadsheet is a popular method for many companies to manage their inventory. You can create different columns to track stock, value, sales and more. Spreadsheets also enable you to make automatic calculations, improving efficiency and accuracy. Some programs also allow you to share spreadsheets and access them remotely which can enhance communication with other team members.

Integrated retail operations solutions

An integrated retail operations solution is popular in several larger corporations as it integrates with their current software programs and applications. This type of system can help a company monitor inventory, record accounts and track orders in one place. It offers companies cross-organisational data, which can lead to improved communication and increased efficiency.

ERP system

An ERP (enterprise resource planning) system for managing inventory provides an integrated solution system for companies. This type of system is especially useful for organisations with large supply chains and warehouses in various locations, such as large multinationals. They offer a rounded view of a business's finance, processes, stock and logistics in a single interface.

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How to select a suitable inventory tracking system

There are a lot of different systems to choose from. You can use the following tips to help you decide which one is the most suitable for you:

1. Evaluate the existing inventory requirements

The first step is to evaluate the existing inventory requirements according to the size of the company and your estimated growth. While larger companies can have more complex inventory requirements that entail more advanced inventory management capabilities, for a small company, it may be sufficient to manage your inventory with a spreadsheet or a simple pen and paper. You can also create a list of any common inventory challenges that the company faces to help you establish any particular requirements you may have.

2. Define the business objectives

The next step is to outline what the core business objectives are by considering what goals you're aiming to accomplish or problems your hoping to overcome. You can begin by making a list to record your goals. Some popular business goals include lowering costs and creating higher revenue margins. Depending on your role, you may meet and discuss these goals with your team members or the management team.

3. Create a list of key features

Once you've determined what the core business objective are, you can create a list of the features in an inventory tracking system that can help you realise them. Think about factors such as which distribution channels the business uses to sell its products, who in the company requires access to the system and any software or applications your system needs to integrate with. Some systems offer integrations that allow you to more easily track stock across distribution providers, accounting systems and logistics suppliers.

Once you've made a list of the key features you're looking for, you can order them according to priority from the most important to the least important. This helps you to evaluate different systems according to how they meet your criteria and choose the best system for your needs.

4. Establish your budget

As a final step, you can determine your budget and calculate how much an inventory tracking system could save the business each month. The cost of an inventory management system can vary considerably according to different retailers. By comparing the cost with the potential savings, you can select the most suitable and cost-effective system for the organisation.

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