How Inventory Management Systems Work

Inventory Management History

The constant "beep, beep, beep" of bar codes being scanned at a check-out lane represents a pillar of modern inventory management systems: stock tracking.

In the earliest days of shop keeping, merchants wrote down purchases, or they looked at how many units were gone at the day's end and then did their best to forecast future needs. Experience and intuition were key skills, but it remained an inexact method, even when applied to operations that were quite small by today's standards.

After the Industrial Revolution, efficiency and mass production became the main goals of businesses, along with an improved customer experience at the point of sale. A team at Harvard University designed the first modern check-out system in the early 1930s. It used punch cards that corresponded with catalog items. A computer would read the punch cards and pass the information to the storeroom, which would then bring the item up front to the waiting customer. Because of the automated system, the machines could also generate billing records and manage inventory. The system proved to be too expensive to use, but a version of it is in use today in some stores, where merchants place cards with product information on the aisle for customers to select and bring to the checkout line. This usually applies to items that are expensive or large and to controlled items, such as medicines.

Merchants knew they needed a better system, and researchers created the forerunner of the modern bar-coding system in the late 1940s and early 1950s. It used ultraviolet light-sensitive ink and a reader to mark items for sale. Again, the system was too cumbersome and lacked the computing power needed to make it work. Technology had yet to catch up with their ideas.

The development of affordable laser technology in the 1960s revived the concept. Lasers allowed smaller, faster and cheaper readers or scanners. The modern bar code, or the Universal Product Code (UPC), was born and caught on just before the 1970s. As computing power became better, the power of UPC codes to help track and manage inventory improved exponentially.

During the mid to late 1990s, retailers began implementing modern inventory management systems, made possible in large part by advances in computer and software technology. The systems work in a circular process, from purchase tracking to inventory monitoring to re-ordering and back around again.

In recent years, another promising technology for tracking inventory has also has made its way into stores, warehouses and factories. Radio frequency identification, or RFID, uses a microchip to transmit product information -- such as type, manufacturer and serial number -- to a scanner or other data collection device. It's superior to bar codes in several ways. For instance, a scanner reads the information from an RFID from several yards away, making it ideal for tracking items stacked on high shelves in warehouses. It also can encode more data than a bar code and in some systems tell merchants if an item is out of place in the store, providing excellent anti-theft characteristics.

Another popular means of automated inventory control is vendor-managed inventory. In this arrangement, the vendor is responsible for keeping its products stocked on a store's shelf. The vendor and retailer work closely together and share proprietary information.

This system also has many advantages for vendors. It allows them to ensure their products are properly displayed and available, and it also puts them in close contact with the retailer and its sales data. The feedback the vendor receives can play an important role in its marketing, research and development.