4 Different Types Of Inventory Management Systems: Detailed Information

Ngoc Lee
4 Different Types Of Inventory Management Systems: Detailed Information
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Choosing the best type of inventory management system for your company is a critical step toward financial success. You must decide based on your business’s circumstances instead of modern or popular systems.  The most suitable inventory management system will improve your inventory management and then help you gain more profits as well as customer satisfaction. Go through this guide blog to discover what four types of inventory management systems and their pros and cons.

4 Types Of Inventory Management Systems:
 4 Types Of Inventory Management Systems

What Does Inventory Management System Mean?

An inventory management system tracks your products throughout your supply chain, from purchasing to producing to end sales. It regulates how your company approaches inventory management. While there are some distinctions between inventory control and inventory management, the fact is that a useful inventory control system does it all by providing a holistic approach to inventory and enabling companies to use lean practices to improve efficiency and productivity along the supply chain while having the proper inventory at the proper location to satisfy customer needs. The inventory management system includes four types which are:

  • Periodic inventory system
  • Perpetual inventory system
  • Radio frequency identification
  • Barcode system.

Within these systems, two types of inventory management systems employed to assist the entire inventory control process are barcode systems and radio frequency identification (RFID) systems. It is crucial to know what types of your inventory are to find a suitable inventory management system. There are four categories:

  • raw materials
  • work-in-progress
  • finished goods
  • MRO goods.
 Four types of inventory

4 Different Types of Inventory Management Systems

Periodic Inventory System In Inventory Control System

Periodic inventory is a method of inventory management that is fully based on stocktaking. Let’s stay with us to learn more about the periodic system.

Definition Of A Periodic Inventory System 

The periodic inventory system is a technique of inventory valuation for financial reporting that involves doing a physical count of the inventory at regular periods. This accounting technique begins with inventory, adds new inventory purchases over the period, and substracts ending inventory to calculate the cost of goods sold (COGS). The periodic inventory system does not track inventory daily, and they enable companies to know the beginning and ending inventory levels over a certain time. Physical inventory counts are used to track inventory in these inventory management systems. 

When the physical inventory is finished, the amount in the purchasing account is transferred to the inventory account and modified to reflect the cost of the finishing inventory. Businesses can choose to compute the cost of ending inventory using LIFO, FIFO, or another technique. Remember that beginning inventory is the preceding period’s ending inventory.

Benefits of A Periodic Inventory System

The main advantages of using a periodic system are its deployment simplicity, cheaper costs, and reduced workforce requirements. It simply takes a few minutes to incorporate a periodic system into your company. Simple counts on legal paper will serve for gathering product data, particularly if you only sell a few items. A simple count during the day or week is frequently sufficient for a small company to gain a good trip on their inventory. It implies that no expensive or complex technology is required. Only the most basic information collecting instruments are a pen and paper.

Drawbacks of A Periodic Inventory System

One significant disadvantage is that you only gather minimum information, generally simply a discrete product count. You also do not gather or publish this data in “real-time”. You update inventory levels at specific intervals rather than when you acquire or sell them. In reality, you will not have much data to work with if you need to trace your items from start to finish or analyze shortages or overages. You cannot always determine the root of problems. However, there are other drawbacks that you should consider:

  • Estimation errors: In the periods between store inventories, you must calculate the cost of items sold as well as which items and quantities are accessible. Once you have conducted a physical count, this estimation may be far from the real COGS.
  • Significant adjustments: There is no mechanism to account for losses, overages, or outdated products between stock-takings. It might result in significant, expensive modifications following your next physical count. The only time a periodic system is up to date is immediately following the stock-taking and accounting activities.
  • Inability to scale: Because it is predicated on your ability to track your goods, a periodic system does provide some space for growth. Scaling your company with a periodic system, on the other hand, becomes more time-consuming and difficult as you expand and add goods to your inventory.

Who Can Use A Periodic Inventory System

The periodic inventory control system is better suited to small firms with a limited number of SKUs that are not concerned with expanding their business over time. Any business may use a periodic system since it requires no additional equipment or code to function and hence costs less to develop and maintain. Furthermore, when time is limited, or staff turnover is significant, you can teach employees to perform simple inventory counts. Besides, if you handle your supply chain process, sell a few items, and keep an eye on your goods as they pass through your company, you may also employ a periodic system. A periodic technique will be ineffective if you need to examine missing inventory or imbalanced quantities.

Periodic Inventory System Implementation

Companies have to manually import the number inventory into the program at a specific period. Thus, the system necessitates keeping separate accounts for initial inventory, acquisitions, and on-hand stock. After you have acquired your ending count, calculate your cost of goods sold by taking the beginning inventory costs for a period, plus the cost of inventory acquisitions over the interval, and remove the cost of your remaining inventory. 

👉 Read More: Periodic Inventory System Calculator: All Formula

 Cost of goods sold formula

To keep track of sales, you have to compare reported sales to the beginning and ending counts at the end of a period. Since the numbers are not adjusted until you have your finishing counts, it will not directly impact your inventory account. In the periodic inventory system, there are three frequently used valuation methods, including first-in, first-out (FIFO), last-in, last-out (LIFO), and weighted average costing (WAC). The specific identification valuation method is also used but is less common than the other ones. 

 FIFO and LIFO valuation methods

Perpetual Inventory Management System

Another type of inventory management system is the perpetual inventory system which is the favored accounting approach for industry leaders worldwide, but it requires a suitable technology foundation to be implemented inside.

Definition of Perpetual Inventory System

A perpetual inventory system is software that constantly gathers data on a business’s products. The system allows you to track every transaction, including sales and purchases in real-time. It also keeps track of all essential product details, like storage location and physical measurement. A perpetual inventory system is more detailed and comprehensive than a periodic system. It continuously updates inventory accounts and records for additions and substractions as inventory items are acquired, sold from inventory, transported from one place to another, chosen from inventory, and destroyed. 

👉 Read More: What Is The Difference Between Periodic And Perpetual Inventory Systems

Benefits of Perpetual Inventory Systems

In many aspects, a perpetual system outperforms a periodic one, particularly for businesses concerned with long-term viability. Using a perpetual inventory system can bring many benefits, such as:

  • Real-time updates: As soon as the business acquires goods or sells some goods in the inventory, the perpetual system helps track changes in inventory levels in real-time. As a result, continual stock tracking enables a company to identify products running short at the proper time.
  • Easily controlling multiple locations enables a large business with several sites to run efficiently. It is impossible to manage the stock levels of all retail chains at different locations without a perpetual inventory system. However, with real-time inventory items of all the sites on your screen, the center facility may quickly determine the overall demand of the chains and place orders for it.
  • More accurate forecasting: A perpetual inventory system enables you to understand your consumers’ purchasing habits. Because the inventory system is frequently updated, for instance, the ice cream chain might discover that a specific time of day creates demand surges or that a weather condition is associated with increased demand for a specific ice cream flavor. As a result of this insight, the company may then construct its supply chain around its consumers’ purchasing habits.
  • Assists in preparing the financial statement: The inventory value is a part of financial accounts. Because the stock count is readily available, a perpetual inventory system reduces delays in creating financial statements. As a result, this approach avoids the time-consuming and costly procedure of manually counting inventory levels.

👉 Read More: Top 10 Advantage Of Perpetual Inventory System You Should Know 

Drawbacks of A Perpetual Inventory System

Despite the many benefits that a perpetual inventory system can bring, it still has some drawbacks, but not significantly.

  • Expensive method: The technology required for the system to function, such as computer software, barcodes, and scanners, might be prohibitively expensive. Updating the old system to suit the new one may incur additional costs. Another cost is training personnel or hiring new employees to work on the system. Thus, this technique is not suggested for small businesses with poor margins.
  • Breakages and destruction are not accounted for: If certain things break down or deteriorate after being purchased and stored, they will not be seen until the employees do a physical count. Therefore, the broken components still are counted as inventory until there is a “voluntary” physical count. This problem will lead to the risk of inaccuracy in the perpetual system.

👉 Read More: Top 10 Disadvantages Of Perpetual Inventory System

Who Can Use A Perpetual Inventory System?

It suits large enterprises with massive inventories. It is also suitable for small to medium-sized companies that are developing and require scalability. Besides, the perpetual inventory system is used for large corporations that have trouble executing the cycle counts. Moreover, a business that owns multiple retail locations may find it easier to maintain inventories when a product database is kept up to date through a perpetual system. Other companies that require permanent inventory concentrate on drop-shipping, in which producers ship to consumers directly or in trade and distribution. The merchandise at these enterprises is constantly changing, and there are also continuous returns and exchanges. Knowing which stocks are accessible at any time necessitates a perpetual inventory system. 

👉 Read More: Lifo Perpetual Inventory Method: Formula And Example 

👉 Read More: Fifo Perpetual Inventory Method: Formula And Example 

👉 Read More: Perpetual Inventory System Calculator: All Formula

 A Perpetual Inventory System

Perpetual Inventory System Implementation

First, you must install a point-of-sale system (POS). A POS helps you capture transactions from all retail channels in real-time and transmit the data to an integrated inventory management system. For example, when you are in supermarkets, you can see cashiers scan products’ barcodes, and the computer promptly recognizes the goods. 

Next, you have to update the cost of goods sold to the system, which can improve financial reporting through purchase invoices and transactions. Then, the POS system will modify the reorder points by sharing transactional data with inventory management and ordering systems to keep adequate inventory levels, which will help businesses prevent over or under-ordering items that can limit revenues. 

After that, low inventory levels can be automatically triggered by connecting all management solutions and generating a new purchase order. Employees can then evaluate and approve the request before it is forwarded to the provider. Finally, employees must integrate received items by scanning the packages when inventory shipments arrive at the warehouse. This combines the amounts into all sales channels, allowing clients to start buying the items.

Manual Inventory In Inventory Management

Manual inventory, like its name, shows that you have to update information related to products in your inventory manually. Despite that, it is still useful in some situations.

Definition Of Manual Inventory

The manual inventory system is a technique that manually records all data on inventory sheets. It is an old approach that many people still use today. In the manual inventory system, each record is manually maintained and updated by an employee who tracks everything, which raises the incidence of human mistakes. Furthermore, this technique can lead to data loss since inventory sheets may be ripped down over time, changed, or destroyed. [caption id="attachment_4356" align="aligncenter" width="1000"]

manual inventory system-is-a-technique-that-manually-records-all data-on-inventory-sheets
 Manual inventory system is a technique that manually records all data on inventory sheets

Benefits of Manual Inventory

Although this is an old technique, there are still advantages that those modern techniques may not have.

  • Cost and time: The manual inventory system is cheap because it just needs a pen and a piece of paper. It also saves time because you do not have to scan products into an automated system.
  • Power outage and tamper resistance: You do not have to worry about the power outages that would disrupt computerized inventory system because it is not working on a computer. Moreover, the products are physically tallied. Manual methods are also more difficult to tamper with, while the automated system can be changed to artificially lower inventory to steal.
  • Eyesight is better on some occasions: The manual inventory system allows sellers and employees to physically check product availability, which will eliminate the data entry mistakes possibility, and avoid dissatisfying buyers. It also allows staff to physically check the goods and guarantee that each product fits for sale.

Drawbacks of Manual Inventory

Manual inventory only works well when your business is small with not too many goods. If you are running a medium-sized business above or want to expand your business size, it would not be a great technique for many reasons:

  • Since all the data is written down on paper, they are easily stolen or lost, and small businesses must rebuild everything. Besides, if there are thefts or losses, you cannot track them like using an automated system.
  • Human mistakes can happen commonly, such as writing the wrong quality of selling goods, which may have a domino effect, ranging from incorrect inventory counts to missed buyer orders.
  • It is not suitable for small companies that want to scale continuously, adding new suppliers and goods each year.

Barcode Systems In Inventory Management 

Inventory management solutions that use barcode technology are more precise and efficient than human operations. Just go through to learn more about the barcode system. 

 Barcode system

Barcode Sytems Definition

A barcode is a one-of-a-kind symbol containing numbers or text, similar to what you may find on grocery merchandise. The graph visually depicts data. When scanning a barcode, the product’s details are immediately sent to a computer. Barcode includes two types which are 1D barcodes and 2D barcodes. 

👉 Read More: Barcode Inventory System: Its Benefits & How To Use It 

A barcode system allows companies to monitor inventories more quickly and easily. When items contain barcodes, they are scanned using a portable mobile device and linked in real-time with inventory management software. When used with an overall inventory control system, barcode systems automatically update inventory levels when workers scan them using a scanner or mobile device.

Benefits of Barcode Sytems

The advantages of adopting a barcode inventory system in your inventory system are numerous.

  • All inventory transactions are accurately recorded.
  • Reducing time-consuming data mistakes that are common in manual or paper system.
  • Ease and speed scanning
  • Automatically updates on-hand inventory.
  • Keep track of transaction history to establish minimum levels and reorder amounts simply.
  • Simplify documentation and reporting.
  • Quick return on investment (ROI).
  • Streamline inventory movement between warehouses and across different sites and from receiving to picking, packaging, and shipping.

👉 Read More: How to Create a Barcode Inventory in Excel 

👉 Read More: Top 10 Barcode Inventory Management Software in 2023

Drawbacks of Barcode Sytems

Despite the useful and cost-effective barcode system in the inventory management system, there are some disadvantages that you should notice:

  • It takes a substantial amount of work upfront to label your products although barcoding can help you save time in the long term.
  • Workers must remember to scan the goods ' barcodes whenever goods are received, delivered, or transferred unless the system may produce more problems than it can solve.

Radio Frequency Identification (RFID) System In Inventory Management

Radio frequency identificatio system is becoming more widespread these days.

Radio Frequency Identification Systems Definition

Radio frequency identification is an active-and-passive technology that helps to manage inventory movements by using radio waves. Active RFID technology is defined as fixed tag readers strategically placed throughout the warehouse, while passive RFID refers to portable readers. The RFID tag is a tiny microchip typically connected to an antenna and can store various data information related to a specific product. 

Tags are encased in paper, plastic, or other similar materials and are attached to the item or its wrapper, a container or pallet, or even a delivery truck or van. The radio frequency identification reader interrogates tags and takes responsibility for transmitting and receiving radio signals from and to the RFID tag. Then there will be specialized computer software to compile and analyze the information gathered by the reader. Readers can be put at various locations across a warehouse to track when products are moved.

 RFID tag and RFID reader

RFID enables a company to identify specific items and features and track them from manufacture through point-of-sale.

Benefits of A Radio Frequency Identification System

Using RFID technology in inventory management has supported businesses solve many problems and boosted efficiency and precision. Let’s check out what benefits the RFID can bring to us in the below part.

  • Using an RFID system can support your company operations running smoothly by knowing exactly where and what stock is. You can then minimize out-of-stock products because a more accurate real-time view of the warehouse is accessible at facilities.
  • You can reduce the labor expenses by lowering the workforce required for monitoring and warehouse inventory management.
  • Less manual intervention is required, less order entry mistakes are reduced, which helps to increase staff productivity.
  • It can assist in reducing inventory stocking levels and corresponding warehouse space needs.
  • RFID technology substantially influences the business’s tax liabilities and profitability analysis by providing necessary data to execute first-in-first-out (FIFO) or last-in-first-out (LIFO) inventory management.
  • Real-time information provided by the RFID system can help businesses guarantee that the correct consignment is delivered to the correct pier and loaded onto the correct truck.
  • Advanced data collection technologies, for example, imaging can provide pieces of evidence or conditions for return records, reducing the likelihood of consumer disputes.
  • Verifying the correct products have been selected and immediately subtracted from inventory through a simple scan of the RFID tag.
  • Quick and easy access to the order database offers the real-time visibility required to cross-dock inbound items for quick transportation to fulfill client orders.

Drawbacks of Radio Frequency Identification Systems

However, neither systems are perfect. The RFID still has some certain drawbacks, which are:

  • RFID tags are considerably more expensive than barcode labels. Hence they are often utilized for higher-value commodities. Furthermore, changing to RFID technology costs lots of money because it requires your company and your suppliers, clients, and transportation businesses to have the necessary equipment.
  • RFID tags are not suitable for high concentration situations of metals or liquids goods since they are found to have interference concerns.
  • Your servers and system may get overburdened because these tags contain too much data.

In conclusion, we hope this blog will provide you with the most fundamental and detailed knowledge about the four common types of inventory management systems used in inventory management today. Understanding these systems will help you a lot in managing your inventory. You've found this article so helpful? Do not forget to follow our Fanpage and website to read more interesting articles!

Ngoc LeeNgoc Lee is an Content Creator Manager at EFEX. She wields her long-term expertise in Logistics and Supply Chain, harnessing her top-notch writing and research skills to bring incredibly valuable content. Whether you're a small startup or a well-established enterprise, Ngoc Lee is here to equip you with the essential knowledge of e-commerce, fulfillment, and all things business-related.