An inventory management system is a business automated process through which items of inventory are efficiently managed for an institution to produce the most favorable result for the organization as a whole and help to achieve the objective of the organization. An Inventory management system can have multiple applications and usages, starting from inventory procurement to the consumption of the produced products.
Did You Know? The stock of goods held by firms-in India has increased by ₹ 362.62 crores in the second quarter of 2022.
What is an Inventory Management Software System?
Inventory Management Software System provides visibility entirely for stock that helps to maintain the optimal amounts for continuing orders despite holding too much for a given item. This automates critical tasks reducing the chance for human errors, specifically through integration with key systems.
The automated processes are designed to keep track of inventory movements within the entity and produce statistics that can be used to make proactive decisions.
Inventory management has been a business key that maintains the stock of goods or raw materials on hand. Inventory management had been a manual process, modern technology eliminated the requirement for labour-intensive manual inventory management systems. As inventory management software is significant for regular operation, it is important to select a solution that is reliable, effective, and has features that are needed.
Also Read: What are Accounting Principles and Accounting Concepts - Here's a Detailed Overview
How does Inventory Management Software Work?
A system of Inventory management works on complex data produced within the entity. Thus, the automated process works with the integration of various data produced by the entity to make insightful decisions.
To understand the inventory management software system, we have broken down the inventory management process into various other processes. It is worth noting that the inventory management system starts from procurement and ends with the point of consumption of goods produced.
1. Inventory Procurement
Inventory procurement refers to the process through which raw materials are obtained through suppliers.
Some observations to understand the use of Inventory management software on inventory procurement
- Based on the consumption patterns of various items of raw materials, the automated system will show you when to order the new batch. It can also produce statistics to maintain a minimum amount of stock all the time based on the lead time of the suppliers.
- With the available data, the system can also produce data about the closing balance of various inventories.
- Based on the sales pattern over the year, the system can produce the desired level of inventory that should be maintained in other months of the year if your products have seasonal demands.
- Earlier, at the store manager's request, the purchasing department places the orders for inventory items. Now, through an automated process, the purchase department can track the inventory balances and, when required, place the order.
2. Production Process
In production, there can be multiple stages of production for example - in the manufacturing process of the automobile, different types of materials will be required at the assembly and testing stages.
This type of complex production will require complete integration of an Inventory management software system within the entity:
At the production stage, there is a normal amount of wastage of input to produce a certain output ratio. The Inventory management system can continuously monitor the number of abnormal wastages based on the previous input-output ratio. This may give insight for the managers to control costs.
There are certain industries where joint and by-products are produced through complex stages of production, like petroleum refinery or chemical production. This causes companies to place control systems at those production stages to reduce wastage.
3. Selling and Distribution
Every good, produced in its intended form, called finished goods, must be available to the market where buyers or consumers can purchase them. The selling and distribution process begins immediately after production completes and till the goods are made to the point of consumption for the users.
- A company with a strong and efficient distribution channel always rules the market. It is especially true for FMCG companies.
- The finished goods are distributed through various channels in remote areas of India. Automation systems are also used to control inventory management at various locations.
- Haldiram’s is one of India's fastest-growing food outlets. It is worth noting that Haldiram’s deals in foods that are one of the most perishable items having low self-life. Due to its robust inventory management system, the outlet has grown so fast.
Also Read: What is Accounting Information?
Benefits of using an Inventory Management Software System
There are enormous benefits to using inventory management system software. An efficient automated system can reduce human errors causing the entity to be more productive in its operation and management. A robust system will integrate the various processes within the entity into a functioning whole.
Few benefits of an automated environment in the Inventory management system:
An efficient inventory management system comprises three interrelated processes:
- Production and selling
Each of these processes can produce various reports, analytics, and statistics. Automating these processes may cause these data to be integrated to produce more insightful results.
Economic Order Quantity
An Economic reorder quantity is the level of reordering inventory where an organization has the lowest inventory carrying cost and ordering cost. The EOQ may change based on the production level and various other factors. An inventory management system keeps track of inventory consumption, lead time, and other factors to produce the EOQ for every order. Here is the formula for EOQ
EOQ = √(2 x AO)/C
A - annual Consumption of Inventory
O - Ordering Cost
C- Carrying costs of inventory per unit stored per year
For example, a company sells 10,000 pairs of jeans a year. The carrying cost of jeans comes to ₹50. The ordering cost is estimated to be ₹20. The company intends to find a level they need to reorder materials for managing costs efficiently. They decide to use the EOQ method.
Therefore, EOQ = √(2 x Annual demand x ordering cost per unit)/annual carrying costs per unit
Ie, EOQ = √(2 x 10,000 x 20)/50 = √8000 = 89 (rounded off)
Therefore the company needs to reorder at 89 units.
Also Read: Cost Accounting - What is Cost Accounting, Types & More!
Inventory is the biggest investment of working capital for any manufacturing concern. Knowing the consumption pattern of the inventory may help the business accurately predict Procurement requirements. The Inventory management system can analyze the consumption patterns at a different production levels based on usage and produce results for abnormal wastages of material inputs.
Thus, the Inventory management system works in complete coordination and integration within the various department data. For every master data produced, the system may collect information from any relevant source within the entity. It is the reason why it is difficult to understand the inventory management software system. However, we have broken the complex structure of the Inventory management system into simple points to make you understand the Inventory management software systems as easily as possible.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.