Inventory Management Review: Different Inventory Systems

October 04, 2005

Different Inventory Systems

Assuming a firm has performed Economic Order Quantity and Reorder Point analysis to determine how much to inventory to order and when to reorder inventory, the firm still needs to be able to keep track of inventory levels so they know when they reach the Reorder Point. This article will detail a number of different inventory systems starting with the most archaic and working up to the most advanced.

Physical Counts (Periodic System)

The most basic method of inventory tracking is physical counts. Physical counting is exactly what it sounds like; if you want to know your inventory level, you better take off your shoes so you can count on your toes when your fingers run out. Prior to my work described in Notes from an Inventory Management Consulting Job, the firm I consulted for relied on physical counts to try and figure approximately where they were at. Lucky for them they didn't bother with ROP because as you can appreciate, it's very difficult to reorder at the reorder point if you aren't constantly aware of your inventory levels.

Two-Bin System

The two-bin system is only slightly more sophisticated than the physical count system. Using the marvels of modern technology, this system uses two bins of materials. When one bin is empty, it's time to re-order.

Perpetual Tracking

A perpetual track is the method I designed in the previously mentioned consulting job. This method of counting is demand driven. Instead of counting how many items are in inventory, you count how many leave inventory. The demand can be tracked by batches of inventory usage, such as demand that is entered once a week, or they can entered in real-time which provides the ability to continuously monitor inventory levels. If you are already in the practice of counting demand, this is a great way to track inventory because it involves little additional effort. For what I set up, it was ideal because there is little variability in the products that are demanded. For a supermarket, this can be more difficult because of the variety of products sold. Luckily, the next section highlights how firms with broader product lines get over this hurdle.

Universal Product Code (UPC)

UPC is a system that supermarkets first implemented in the 70s (more info). This requires unique codes to be put on all types of inventory and is usually accompanied by a bar code that can be scanned via infrared scanning guns. If you've been to the supermarket at in the last 30 years and had a pulse at the time, you probably noticed that everything you buy is scanned into their system. In addition to helping the market determine how much you should pay, this also gives supermarkets, and other firms, the ability to track and count the movement of any and all inventory with a simple infrared scan.

My favorite example of infrared product tracking is the implementation of package tracking that Fedex and UPS have incorporated into their business processes. In case you're unaware, both Fedex and UPS now track all packages at every stage from pickup to delivery. The beauty behind the system these two companies have implemented is that not only does it directly help their operations management, but it also directly improves customer service. Now, customers can log onto a Fedex or UPS website from anywhere in the world, enter in the tracking number they received when they dropped the package off for shipping and know exactly where their package is in real time. Marketing studies have shown that informed customers are typically more satisfied and this process is a wonderful example of how the businesses are able to inform themselves and their customers with one technology.

Radio Frequency ID (RFID)

RFID, which I have written an article about, is another method of tracking inventory. Instead of using technology to track inventory as it is moved, RFID counts inventory automatically from a remote location. This is superior to perpetual inventory tracking or perpetual inventory with the UPC for a couple of reasons. Most notably is that RFID accounts for shrinkage (lost inventory, not what happens to Costanza in cold water). As much as we might not want inventory to just disappear, the fact of the matter is, things grow legs. Also, inventory is often scrapped. Perpetual counts that lower inventory levels only when there is demand don’t account for lowered inventory when a good is stolen, unless the thief enters it into the system to be a nice guy. RFID counts what is actually there, and it can tell you exactly where it is.

Different systems have their time and place so you should consider what's right for you. It may turn out that the two bin system is a great fit for your operations. If holding costs are really low, why not go for the two-bin approach. Hell, you might not want to even invest in two bins. Maybe you can easily do a physical count on a daily basis. The key is to find a system that works for your needs.

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October 4, 2005 in Inventory Basics | Permalink