Many small business owners, especially if the business has very few products, keep track of inventory manually. The easiest way to perform manual inventory management is to use a spreadsheet. For example, a small bakery might use a spreadsheet to keep track of inventory purchases and usage. The owner can also set up the spreadsheet to calculate when ingredients need to be reordered. At the start of each week, the owner manually counts the raw ingredients and components she has on hand. She enters these values in the spreadsheet. She also enters her expected usage based on existing orders. Using the appropriate spreadsheet formulas, she determines if she has enough materials for the week or if she‘ll need to purchase more. Manual systems allow the small business owner to manage inventory with very little investment in systems or training. Maintaining data integrity is a major downside to managing inventory using a spreadsheet. A single data entry or formula error can cause major inaccuracies in the data output.
Automated Inventory Management Technology
Automated systems are designed for deployment when a company moves thousands, if not hundreds of thousands, of products and raw materials during operation. As a result, automated systems rely on computer-based tracking and tracing technologies, like barcodes, to provide information and manage the flow of goods. In addition, inventory management systems may include the use of automated identification and data capture (AIDC) technologies, including radio-frequency identification (RFID) chips.
Small-Business Accounting Tools and Systems
In recent years, the development of smart phone apps has led to the creation of additional inventory management systems. In a sense, these are still warehouse management systems (WMS) but they rely on manual data entry and processing, making them susceptible to errors and problems. Furthermore, these solutions lack scalability needed when expanding a company.
Continuous Versus Periodic Review Systems
In continuous review systems, orders are typically placed in the same quantities, but the system only places an order when the stock reaches a certain threshold. Meanwhile, periodic review systems order products at the same time, but the number of items changes to reflect individual level needs of products.
Inventory management systems that use barcode technology increase the accuracy and efficiency of managing inventories. All major retailers use barcode technology as part of an overall inventory management program. When a barcode gets read at the point-of-sale (the computerized cash register), inventory sales data are immediately read to a broader system that maintains usage statistics. The company‘s purchasing department uses these data to make buying decisions based on sales and existing inventory levels. Barcodes also manage inventory at the warehouse level. Most warehouses use barcode or radio frequency identification (RFID) to scan incoming inventory into the warehouse‘s inventory management or warehouse management software. Barcode technology facilitates the movement of inventory within the confines of the warehouse (from one location to another) or from the supplier to the warehouse (receiving) and from the warehouse to the customer (picking, packing and shipping).
Radio Frequency Identification
While barcode technology has done a lot to increase the accuracy and efficiency of managing inventory, radio frequency identification (RFID) has raised the bar on inventory management. Companies that use RFID typically move thousands of pieces of inventory through their doors. RFID uses two types of technology to manage inventory movements–active and passive technology. Active RFID technology uses fixed tag readers assigned throughout a warehouse. Anytime an item with an RFID tag passes the reader, the movement of the item is recorded in the inventory management software. Active systems work best in environments that require real time inventory tracking or where inventory security problems exist. Passive RFID technology requires the use of handheld readers to monitor inventory movement. Just as in an active system, once an inventory item‘s tag is read, the movement data are transmitted to the company‘s inventory management software. Because RFID technology has a reading range of up to 40 feet using passive technology and 300 feet using active technology, it greatly increases the accuracy of moving inventory around a warehouse.