Inventory Management Guide

Chapter 5. What Are Inventory Management Systems?

An inventory management system tracks goods, ensuring they are stocked, organized, and sold efficiently. Our inventory management guide explains all.

Welcome to Chapter 5 of Sellercloud’s inventory management guide. In this chapter, we will get a bit more technical on how inventory management systems work.

Specifically, we’ll look at the relationship between hardware and software in an inventory management system and discuss the importance of barcodes.

Is this topic too complex? Head back to the guide homepage and check out the previous chapters of our inventory management guide.

What Does an Inventory Management System Do?

A common theme throughout the chapters of our inventory management guide is that some inventory management terms are rather similar—but a word or two can make a big difference in definition.

So, let’s quickly go through the difference between an ‘inventory management system,’ an ‘inventory control system’ (what we discussed in Chapter 4), and ‘inventory management techniques’ (Chapter 3).

An inventory control system is a broad term that includes the processes, tools, and techniques businesses use to manage and track their inventory.

This includes inventory management techniques, which are used to track and control the flow of products in a business efficiently.

And tools such as inventory management systems that businesses use to efficiently track and control their inventory.

These systems serve as centralized hubs for managing all aspects of inventory, from stock levels and order processing to forecasting and reporting.

Many merchants run their entire operations through these systems.

It’s also worth noting that our previous chapter on inventory control systems focused on perpetual and periodic inventory management control systems.

It is industry standard to use an inventory management system, all of which are perpetual inventory systems, not periodic.

Now we’ve got that out of the way, let’s dive into the key functionalities of an inventory management system.

First off, one of the primary functions of an inventory management system is to track and control inventory. They allow businesses to monitor quantities on hand, on order, and in transit in real time.

This helps businesses avoid stockouts, overstocking, and optimize their inventory levels to the point that works for them.

Another key feature of inventory management systems is the ability to streamline order processing and fulfillment.

They can automate various tasks such as order creation, picking, packing, and shipping, improving efficiency, reducing errors, and ensuring timely delivery of orders.

On a more advanced level, inventory management systems can also forecast demand using historical sales data and advanced algorithms.

This enables businesses to make informed decisions about stock replenishment, optimize inventory levels, and meet customer demand efficiently.

On top of that, inventory management systems can generate detailed reports and provide analytical insights into inventory performance.

These reports include inventory valuation, sales trends, stock turnover, and supplier performance.

Businesses can analyze this data to identify areas for improvement, make data-driven decisions, and optimize their inventory management strategies.

Finally, inventory management systems often integrate with other business systems, such as point-of-sale (POS), accounting, and e-commerce platforms.

These integrations ensure seamless data flow and synchronization across different business areas, minimizing manual data entry and improving accuracy.

It should also be noted that some inventory management systems come with far more complex features than we’ve mentioned above, some of which we will get into in later chapters of our inventory management guide.

How Do Inventory Management Systems Work?

To function effectively, inventory management systems rely on software, hardware, and warehouse processes. Here’s an overview of how these systems work:

Data Input and Storage

Inventory management systems start by collecting and storing data related to products. This data includes SKU, description, cost, quantity, and much more.

It can be manually entered into the system or imported from other systems, such as suppliers or POS systems.

Barcode Scanning and Data Retrieval

Many systems utilize barcode scanners to accurately capture data from barcodes and track inventory.

Scanning a barcode ensures that the correct product is being entered or updated, minimizing the possibility of entering an error manually.

The system retrieves this data from its database, allowing quick and accurate inventory tracking.

Real-Time Updates and Automation

Inventory management systems update inventory records in real time whenever a sale, return, or stock transfer occurs.

This ensures that everyone has access to the most up-to-date information.

Inventory management systems automate various processes, such as generating purchase orders, triggering low-stock alerts, order routing, picklist generations, and selecting the best shipping rates. 

Reporting and Analysis

Inventory management systems generate reports and provide analytical insights based on the collected data.

These reports help businesses gain visibility into inventory performance, sales trends, profit and loss, and much more.

By analyzing this information, businesses can make informed decisions and identify areas for improvement.

What Are Barcode Inventory Management Systems?

Marrying hardware and software, barcodes are enormously useful for inventory management. Barcodes are an absolute must for companies that use serial numbers, have large inventories, or have fast-moving products.

A barcode inventory management system consists of two main components—barcodes and the hardware that scans them.

Barcodes are made up of unique patterns and spaces. These patterns represent specific product information, such as the item’s name, price, and identification or serial number.

Barcodes should be unique for each product and visible on a product, usually placed on a label.

The software that reads the input from the hardware is responsible for capturing and storing this information in a database and modifying this information when needed.

What Are the Benefits of a Barcode Inventory System?

Here are some of the most important benefits of using barcodes in your inventory management system.

  • Instead of manually entering product information, employees can scan barcodes and reduce human error and save time.
  • Since barcodes are unique to each product, it’s easier to track and identify items accurately.
  • Real-time stock level visibility enables businesses to identify slow-moving or out-of-stock items and make informed decisions about restocking and ordering.
  • By automating the inventory management process, businesses can streamline their operations.

What Is the Difference between SKU and Barcode?

It may seem obvious, but it’s important to clarify. As we’ve mentioned before, there are tons of inventory management terms, and some get easily confused.

The terms ‘SKU’ and ‘barcode’ should not be used interchangeably because they refer to different aspects of inventory management, though they both serve as a way to identify a product.

A Stock Keeping Unit (SKU) is a unique alphanumeric code assigned to each product in a company’s inventory.

It helps businesses differentiate between different variations of the same product, such as size, color, or packaging.

SKUs are primarily used internally, enabling businesses to track and manage inventory more efficiently. On the other hand, a barcode is a visual representation of the SKU or other product information.

Barcodes are machine-readable codes that can be scanned to retrieve the associated data. A barcode can hold information such as the SKU name, UPC, EAN, GTIN, ASIN, and more.

In summary, barcodes provide a quick and accurate way of identifying products, simplifying inventory management tasks.

(Tip—head back to Chapter 2 if you need a refresher on inventory management terms.)

How Does a Barcode System Work?

Each product in your inventory is assigned a unique barcode. Barcodes can be generated using specialized software or obtained from barcode suppliers. (As mentioned above, this is often a must-have for large companies.)

When a product arrives or is sold, its barcode is scanned using a barcode scanner. The scanner reads the barcode and converts its pattern into a digital format.

There are different types of barcode scanners, including handheld scanners, mobile devices with built-in scanners, and stationary scanners integrated with conveyor belts or assembly lines.

The scanned barcode is sent to the inventory management software, which retrieves the corresponding product information from the database.

This information can include product name, UPC, EAN, ASIN, and other vital details for identifying the scanned product.

The software updates the inventory database in real time, reflecting any changes made to stock levels. This ensures accurate tracking of items received, sold, or moved within the warehouse.

How Do You Manage Inventory with a Barcode?

You can manage inventory with barcodes by following these steps:

  1. Set up your barcode system—Generate barcode labels using barcode software. Assign barcodes to products and link them to their information in your software.
  2. Train your staff—Enable them to use barcode scanners and warehouse inventory management software and troubleshoot common issues.
  3. Barcode scanning—Scan the barcodes of new inventory using a barcode scanner. This will update your inventory system, reflecting the addition of new items.
  4. Sales and stock movements—Whenever a product is sold or moved, scan the barcode to update the inventory system accordingly. This ensures accurate stock tracking.
  5. Regular audits—Conduct regular audits to reconcile physical stock with the data in your inventory management system.

What Type of Barcode Is Used for Warehouse Management System?

The most commonly used barcodes for warehouse management systems are 1D and 2D

1D barcodes are more traditional, though 2D barcodes are growing in usage. Aside from the barcode’s appearance, the primary difference is the scanning device used.

1D barcodes can encode alphanumeric characters, making them suitable for representing product names, SKUs, and other information.

The usage of 1D barcode symbologies (a system of symbols) can depend on specific industry requirements or regional standards. These can include:

  • UPC (Universal Product Code)—Most commonly used in the US, UK, Australia, and New Zealand.
  • EAN (European Article Numbering)—As its name suggests, EAN is most commonly used in Europe, though it is quite similar to UPC.
  • Code 39—Code 39 is worth knowing about, but it’s not used as much in retail as UPC and EAN.
  • Code 128—Used due to its versatility and compactness, Code 128 is higher quality than Code 39 and includes more digits.

2D barcodes are becoming more popular because they can be read by smartphones and contain more data than 1D barcodes. 2D barcode symbologies can include:

  • QR (Quick Response)—The most commonly used 2D barcode; you can find them almost everywhere. They are usually square-shaped and contain many small black squares.
  • Data Matrix—Less common than QR codes, they don’t contain as much information and are often reserved for specific products.
  • Aztec—Notable for its pyramid-like squares in the middle, Aztec barcodes can take up less space than others. However, they are not used so much for inventory management.

It’s essential to consult industry guidelines and consider the compatibility of the barcode symbology with your inventory management software and hardware.

How to Use Inventory Management Software and Hardware?

Let’s now look deeper at the relationship between software and hardware. This relationship is vital for truly optimized inventory management.

At the bare minimum, inventory management software must assist in managing inventory-related data, processes, and reporting.

It can be cloud-based or installed locally on servers or computers. Businesses should choose software that aligns with their size, requirements, and budget.

This can take time to figure out, and using the wrong system can be costly. Chapter 6 of our inventory management guide will explore the different types of inventory management systems.

Regarding hardware, barcode scanners are essential for accurately capturing barcode information and the computers (and other devices) needed to display information about the product.

But there are many more sophisticated hardware tools that help with inventory management (which we will get to in a moment).

For all this to work, businesses need reliable local area network (LAN) or wireless network (Wi-Fi) infrastructure to connect devices and ensure seamless data transmission. 

Without this, the system will not work as hardware and software will not be able to communicate, halting the majority of work. It’s like the glue between the two.

What Is an Example of an Inventory Management System?

What better way to explain how inventory management systems work than with an example? And what better way to do that than with Sellercloud and its array of hardware and software?

As we mentioned earlier, hardware is not just barcode scanners. There’s a plethora of additional hardware warehouse workers can use to make inventory management more efficient.

On top of that, barcode scanners don’t have to be old-fashioned scanners with a wire connecting to a machine like at a checkout in a supermarket. For example, Skustack can be installed on Android devices.

Such applications let warehouse pickers scan products anywhere on the warehouse floor, which speeds up the process because they can be sure of the product they have.

They won’t accidentally pick up the wrong product, take it to a scanner, find out it’s not the one needed, and have to return it. Instead, they can scan it and know instantly what it is.

Hardware-software solutions can also be implemented to help better organize outgoing inventory. In this case, there’s Skublox.

With Skublox, shelves can be designated for products using a customizable light wall indicating where outgoing products must be placed, sorting them in the process.

And then there’s the 4D Scale, which accurately measures the dimensions and weight of a package, which helps optimize the space used for storing inventory.

This hardware links up through software. Before you know it, an entire ecosystem is working to ensure your inventory is properly and efficiently managed.

Finally, with the accurate data provided by inventory management hardware, warehouse managers can better utilize special software features.

These features can include predictive purchasing and an order rule engine, to name but a few. We will get into these features later in more advanced chapters.

Ultimately, investing in the right inventory management hardware and software is often a winning strategy for success.

Key Points From Chapter 5

Remember these key points about inventory management systems from Chapter 5 of our inventory management guide.

  • Inventory management systems are used to track and control inventory and often use a combination of software and hardware.
  • Merchants can run much of their inventory management operations (if not all) through an inventory management system—including data input and storage, barcode scanning, and reporting.
  • Implementing a barcode inventory management system can significantly benefit your business, improving efficiency, accuracy, and overall inventory control.
  • 1D barcodes are commonly used, though 2D barcodes are also highly useful for inventory management.
  • Barcode scanners are not the only inventory management hardware you want to invest in. Various tools can help warehouse managers organize their inventory better.

In Chapter 6, we will focus more on the different types of inventory management software.

Chapter 4. What Is an Inventory Control System?
Chapter 6. What Is Inventory Management Software?