Advantages and shortcomings of inventory management system

In this post, we will discuss the importance of inventory management system for businesses as well as its advantages and shortcomings.

Inventory management deals with the buying, storing, and sales of goods including raw materials, parts and finished goods. It deals with planning for purchasing, storage and sales of goods. The main aim of inventory management is to ensure that there is no excess stock or insufficient stock. Inventory management if done right, helps companies save both time and money and drive customer satisfaction higher. Proper inventory management ensures that the right amount of stock is always available with the company or sufficient stock to meet customer demand and there is no overstocking or understocking, both of which can cause losses and problems. In case of understocking, companies are unable to meet customer demand and in case of overstocking capital gets tied in excess stock. However, there are many more issues that inventory management helps companies deal with successfully.

Every company dealing in goods or one that stocks goods needs to adopt an inventory management system. It is the company’s own approach to managing inventory and businesses can select from several based on their own convenience and scale of operations.

Discuss the advantages of inventory management system

Having an appropriate system of managing inventory is crucial to running a business successfully. Without an inventory management system in place or when inventory management is done using manual and outdated methods, companies can lose a lot of money and face operational difficulties. Tracking stock regularly is critical to avoid inventory related and other operational problems including demand and sales related issues apart from quality related problems. You must have the right stock at the right time to meet customer demand successfully and maximize customer satisfaction.

Some of the main advantages of inventory management system are as follows:

Ensures higher inventory accuracy

Accuracy in terms of stocking is crucial for businesses to operate successfully. Especially, it becomes very important for retailers to maintain accurate track of inventory so as to meet customer demand successfully. Having a solid inventory management system in place ensures that you keep track of your inventory and know what is already in stock and what is out of stock. You will order what you need only and avoid ordering items you do not need yet.

Reduces the risk of overselling

Inventory management also helps businesses know about the items that they have in stock and the ones that are out of stock or are on backorder. Otherwise, they run into the risk of overselling which means selling more than you have in stock. Suppose, you have only 50 items in stock and your sales rep ended up taking order for 100 items not knowing there were only 50 available. This can later lead to problems and in many cases loss of customers’ trust. Businesses can avoid the risk of overselling by having a robust inventory management system in place.

Saves time and money

Proper inventory management helps reduce costs and saves time in various operational areas. Until you have sold your stocks, they are gonna cost you. For example, there are costs related to storage, handling, shipping, employee salaries, rent and other types of costs related to maintaining stocks. Apart from that, the risk of theft and obsolescence also grows without a robust inventory management system. Having an inventory management system reduces the chances of wastage and loss and saves you money. Apart from that, in various operating areas including shipping and sales, it also saves you a lot of time to have an inventory management system to safeguard your business against inventory related problems.

Helps avoid over and understocking

Having a solid inventory management system helps businesses avoid overstocking and understocking, both of which can be awkward for businesses. Having too much inventory can lead to wastage and loss. On the other hand, having less inventory will mean inability to cater to customer demand successfully. With a robust inventory management system in place, you will easily know when an item is out of stock and avoid long stockouts.

Helps generate better insights related to sales and marketing

Inventory management systems can also help track and understand sales trends better. The data generated from your inventory management software can be put to use in various ways. For example, understanding sales trends can help you identify the products that are enjoying higher demand, predict future sales of specific products, the products that might need to be discontinued due to overall lower demand as well as products that need to be cleared faster. The insights you gain from your inventory management software can be used for managing prices and offering deals and discounts on products experiencing slower sales or products that might expire or become obsolete.  

Improved supplier management

Inventory management is also related to better supplier management. It provides you critical insights about which products sell more and which ones sell less. Depending on that, you can understand which products you will need to have more than one suppliers for and on which ones you might easily negotiate for lower prices. Now a days businesses are using digital tools for managing suppliers. An inventory management system can help manage suppliers better and keep suppliers updated about changing demand patterns based on which they may need to increase or decrease the supply of specific products.

Higher operational efficiency and productivity

Applying inventory management solutions makes various tasks simpler for businesses and saves them a lot of time. The process can be very time consuming when done manually. This time can be devoted to other operational activities. So, inventory management system can help businesses grow their efficiency by streamlining ordering, storage and other related processes.  Inventory management systems simplify the whole process for businesses and save them both time and money. They make businesses more efficient and productive. Inventory management is like an entire function in itself and due to its impact on operational efficiency of businesses, companies are devoting more resources to it and digitalizing their inventory management processes and supply chain operations.

Maximizing profits

Every business wants to maximize its profits. However, having a robust inventory management system can help a business maximize its profits. Using inventory management tools, businesses can better track availability of products and understand demand patterns for specific products and over specific periods. This can lead to higher inventory turnover which leads to higher profitability for businesses. A low inventory turnover ratio denotes lower sales or excessive inventory which is also known as overstocking. This can also be a sign of problematic inventory management or problem with the merchandising strategy of the company or a sign of inadequate focus on marketing. The speed with which businesses turn over inventory is a critical sign of business performance. Slow selling items drive holding costs higher. It is why businesses must understand both demand and availability to increase their profitability which is possible through a robust inventory management system.

A more organized and problem free warehousing

An inventory management system can also help businesses get rid of several problems related to warehousing. A poorly organized warehouse can become an obstacle to operational efficiency and superior business performance.  However, a more organized warehouse where goods are stored properly and organized by various relevant categories can drive labor costs lower. Many large businesses like Amazon are even using robots to reduce labor costs and increase efficiency of their warehouses. However, the critical thing is to keep the warehousing organized which is possible with the help of inventory management system. While it speeds up warehouse and delivery operations, on the other hand, it can also help with cost savings.

Improved customer experience

At the end, the focus of every inventory management system is to drive higher efficiency for a superior customer experience. Companies that invest in inventory management software and track inventory regularly can keep their customers more satisfied and loyal. Every customer wants quality goods delivered in time. Timely customer service and shipping can help make businesses achieve higher customer loyalty. Apart from that, inventory management also helps fill critical gaps in terms of sales and customer service which can otherwise hurt customer experience.

Shortcomings of inventory management system/software:

While inventory management systems or software are generally beneficial for businesses, they also have a few shortcomings. However, most of these shortcomings are the same as the problems with other general software. Businesses can place some safeguards to overcome these weaknesses. The main shortcomings of an inventory management system are as follows:

Costly solutions for small businesses:

While large businesses can easily implement various types of modern and advanced digital inventory management tools, these solutions can be expensive for small businesses to implement. However, in most cases, while the costs can be big for small businesses, the investment generally leads to increased profits and higher customer loyalty. Another important thing is that now there are several cloud based software available in the market which can be cost efficient inventory management solutions for small businesses.

Can be complex to learn:

The trouble with a new software is that it can be complex to learn. In case of small businesses especially, which have fewer employees and less finance to invest in training and education of employees, implementing such software solutions for inventory management can be complex. However, businesses can overcome these problems using online training solutions which can help employees learn how to use the software faster.

Risk of system crashes and hacks:

Like the other software, inventory management software can also crash. However, to overcome these crashes, businesses can use cloud-based inventory management solutions. The cloud-based inventory management software also offers extra security against hackers and other cybersecurity threats.

Risk of overreliance on digital solutions:

Sometimes businesses end up over-relying on digital solutions for warehousing automation and other inventory management related tasks. Even if you have an excellent inventory management system in place, regular physical audits are essential to maintain efficiency.

A few last words:

Digital solutions for inventory management are being used industrywide for tracking and managing inventory. Companies are investing in innovative inventory management solutions to strengthen their competitive advantage. when we compared the advantages of an inventory management system, they far outweigh the shortcomings which are very few in number. Just like any other technology, there are also some risks associated with inventory management software. The small businesses can especially face more challenges when choosing an inventory management system. However, they can reap its benefits in both the short and the long term. While inventory management solutions can be a bit costly for small businesses, the investment might be worth it in the long term and can drive faster growth. Even small businesses need to keep their business operations organized in order to maintain efficiency and grow their productivity. It is one of the primary benefits of using an inventory management system that you have more organized and clutter free operations. An inventory management system helps you overcome several performance bottlenecks that might be hurting performance and productivity.