How Inventory Management Systems Work

Do Inventory Management Systems Really Work?

With automated inventory management, vendors can ship merchandise directly. Photo courtesy Dreamstime With automated inventory management, vendors can ship merchandise directly. Photo courtesy Dreamstime
With automated inventory management, vendors can ship merchandise directly. Photo courtesy Dreamstime

Essentially, the systems work like this. First, bar codes or RFIDs tell scanners which items consumers are buying. The scanners transmit the information to computers by reading the bar codes and sending that information to the software. The software then interprets the numbers from the bar code and matches those numbers to the type of merchandise they represent. This allows the merchant to track sales and inventory -- either at the checkout counter or with a hand-held scanner -- keeping the store abreast of which items are selling.

Specialized software keeps track of how much stock is going out the door via purchases and how much remains on shelves and in the warehouse, giving managers a real-time picture of what's happening. The software also analyzes the data and makes recommendations for re-ordering strategies. Sometimes, they're programmed to automatically order at a certain point. It's important to note, however, that good systems leave room for human decision-making. The systems provide good information to support decisions but leave the final call up to managers.

Once managers make a re-order decision, the system uses electronic data interchange to communicate its needs for additional merchandise to a vendor. Electronic data interchange is the process of sending and receiving data between two parties -- a retailer and a vendor, for example -- using data transmission lines, such as the Internet. The data is stored in a computer's memory bank and read by managers at both ends of the line.

While inventory management systems offer retailers and vendors many advantages, there are some pitfalls. Because the system aims to keep a bare minimum of stock in store, retailers can be caught short if an item unexpectedly becomes a big seller. Retailers traditionally kept additional stock on hand -- known as buffer or safety stock -- to prevent that occurrence, but many have discontinued the practice. And, as with all technology, these types of systems are subject to the effects of a widespread computer crash or software failure.

Some consumer groups have objected to RFID technology, too, claiming it invades their privacy by providing additional information about their buying habits and personal data. They argue the information could be used to push other products on individual consumers, or be sold to other businesses for similar purchases.

The RFID signals can also "step on" or "collide" with each other, making accurate readings difficult.

Most retailers, however, have bought into the vast advantages offered by such systems. They include the high efficiency, the need for less warehouse space, less cash tied up in inventories and better sales. The systems also promote better information sharing between the retailer and the vendor, which helps drive down cost for both, as well as for the consumer.

The benefits of modern inventory management systems aren't just for the retail and manufacturing sectors. They also offer great advantages for any organization that manages a supply chain for consumable items, such as the military and medical facilities.

And it may not be long before such systems penetrate the household. In 2001, the U.S. Patent and Trademark Office issued a patent for a household "consumable item automated replenishment system including an intelligent refrigerator," according to Patent Storm. The refrigerator uses an array of sensors to tell its owner when a consumable item -- such as milk -- is running low.

Everywhere you look inventory management systems are making sure the products are there when we need them.

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