Retail Business Management: Inventory Management Systems Reinvented

The New Nerve Centre of Retail: Inventory Management Systems

Success in the retail business is about more than just having products that people want. Successful retailers are able move their products quickly and efficiently, whether this is direct to the customer’s door or to physical outlets to ensure shelves remain well-stocked. 

In this article we will look at how modern retailers can use an Inventory Management System (IMS) to manage this process. Once a simple stock-tracking tool, the IMS has evolved into the strategic nerve centre of any retail operation, providing the data and control necessary to navigate the complexities of omni-channel commerce.

What is an Inventory Management System?

Much of the running of a retail business centres around stock keeping. Shops that succeed are those that provide goods that are in demand while not allowing unwanted products to gather dust on the shelves. This holds as true for the smallest spaza shop as it does for online retailers and multinational retail giants. 

An inventory management system (IMS) is a platform or network of software and hardware tools that manage all aspects of retail management. An IMS keeps track of all goods, helping businesses maintain the right levels of stock at the right place and the right time. A modern IMS does far more than just track stock levels; it aids purchase managers in all aspects of their jobs, from alerting managers about low stock levels and creating the required purchase orders to carrying out data-driven demand forecasting. 

The Strategic Importance of IMS in Retail Business Management

Inventory management is strategically important for a retail business’s bottom line as it helps reduce storage costs while meeting customer demand across multiple channels and locations. By using an IMS, retail managers have a unified dashboard that allows them to monitor performance metrics, assess turnover cycles and make data-driven decisions based on consumer behaviour. An IMS also informs strategic business decisions such as pricing strategies, demand forecasting and optimising of supplier coordination.

From Manual Logs to AI: The Evolution of Inventory Management

Inventory management has undergone several technological shifts over the last 50 years, with the pace of change increasing rapidly in recent years. The first major evolution was marked by the scanning of a barcode on a pack of chewing gum in a US supermarket in 1974. Within the next few years, retailers across the world will replace their manual logs and stock sheets with barcode scanners and computerised inventory systems. These rudimentary computer systems were further developed over the course of the 1980s and 1990s, while barcode technology remained largely unchallenged.

During the same time, advances were being made with radio frequency technology. IBM even carried out a pilot test with Walmart in the early 1990s that, although abandoned, laid some of the foundations of the next evolution in inventory management. Adoption of the new technology was initially hindered by high costs and a lack of standardisation, but this began to change when several large funders and institutions supported the creation of the Auto-ID Centre. From 1999 to 2003, the Auto-ID Centre further developed and standardised the technology, paving the way for mass adoption.     

Radio frequency identification (RFID) offers benefits over barcodes as it does not require direct line of sight, making it easier to track products in containers or stacked behind other products on shelves. This functionality came about at the same time as the Internet’s rapid growth and proliferation, allowing companies to track goods across multiple locations from a centralised database.

Today, retailers are taking advantage of recent advancements in machine learning and AI to further advance their inventory management. Modern retail applications incorporate IoT sensors, drone-mounted RFID scanners and cloud-based systems to further optimise supply chains.

How Inventory Systems Drive Business Growth and Customer Loyalty

Inventory systems that are well integrated into the supply chain help retail businesses to better service their customers. The chief benefit they provide is to avoid running out of stock of popular items and the resultant loss of potential customers. Physical stores that are part of a larger chain are also able to source stock from nearby branches or direct their customers there, rather than losing their business to another retailer.

For online stores, inventory systems can provide real-time tracking of deliveries, offering customers peace of mind and avoiding the frustration of delays and late deliveries. Retailers that can deliver quickly and reliably will be far more likely to receive repeat business than those that deliver late and with little follow-up communication.

Key Components of an Inventory Management System

An IMS relies on several tools to allow it to maintain real-time visibility of a retail operation’s stock across all locations. Next, we will look at the different tools that can be used to track inventory and the systems that track and present all that data.

Inventory Tracking: Real-Time Visibility and Location Accuracy

RFID, Barcodes and Smart Shelving

Barcodes and RFID tags are used to label stock and keep track of the physical inventory. Barcodes are very cost-effective, but they require direct line of sight to be scanned. RFID is costlier and more advanced, but it is not limited by line of sight, allowing for much quicker scanning of larger numbers of items.

Smart shelving is the newest of these technologies and can be implemented using a variety of different sensors to detect when products are removed or added to shelves. Products can be detected using weight sensors, cameras or RFID scanners that are connected to the wider IMS system. Another feature of smart shelving is known as smart labelling or pricing. Instead of displaying product pricing on printed labels, smart shelving can use a digital display that can be quickly updated to reflect changes in supply and demand.   

Cloud-Based Tracking Across Warehouses and Stores

While barcodes, RFID tags and smart shelving track physical inventory, this information needs to be collected and stored in a central database so that it can be accessed and viewed from both centralised and localised locations. Cloud-based IMS platforms are able to pull all this data together and display it in a unified dashboard that retail managers can use to make decisions based on real-time data.

Stock Management: Maintaining Optimal Levels

A large part of running a successful retail business involves stock management. As we mentioned earlier, the two biggest risk factors to profitability are running out of stock and carrying too much stock. Retailers need to maintain a balance between having enough stock to meet demand while avoiding overspending on excess stock that takes up valuable retail and storage space. 

Reorder Points, Safety Stock and Overstock Prevention

IMS platforms assist in maintaining an optimal balance of stock levels through automated processes based on defined rules. 
Reorder points and safety stock buffers are used to avoid stock-outs. Reorder points can be automated in an IMS to trigger orders for more stock whenever a certain stock’s level drops below a specified quantity. This is done to prevent running out of popular stock items and is determined in conjunction with safety stock buffers. Safety stock is the amount of stock that is kept in reserve to protect against unexpected increases in demand as well as unplanned delays from suppliers.

While safety stock prevents running out of stock, it needs to be carefully calculated to avoid the equally harmful problem of overstocking. This is done through the complex process of forecasting future demand, which can fluctuate due to various reasons, such as seasonal demand, changes in consumer trends and wider economic conditions. While predicting the future is more art than science, IMS platforms reduce the guesswork by integrating with point of sales systems and analysing historic sales data, which we will look at next.

Integrating Sales Data for Forecasting

For an IMS to operate at its full potential, it should have access to the company’s sales data. This is done by integrating the IMS with the retailer’s point of sale (POS) software. This access to both live and historical sales figures allows the system to better predict future demand. Better demand forecasting helps retailers maintain optimal stock levels that avoid running out of stock while reducing storage costs to a safe minimum.

Integration with Point of Sale (POS) and ERP Systems

As discussed in the previous section, integrating an IMS with a POS system opens up more powerful functionality and helps retail managers better forecast future demand. While conventional IMS software is able to do so, this is where the lines begin to blur, and we move into the territory of Enterprise Resource Planning (ERP) software or systems.

While an IMS is solely focused on inventory management, ERP systems are a more comprehensive solution that includes the functionality of an IMS along with several other business systems, such as accounting, human resources, customer relationship management (CRM) and additional supply chain integration.

Unified Dashboards and Analytics

The benefit of integrating an IMS with POS software or using a fully-fledged ERP system is that it allows retail managers to access and view all of the business’s operations in a single interface in real-time.  With a unified dashboard that offers access to all the company’s sales data and inventory tracking, retail managers are able to view analytics to gain insights into the company’s stock position, margins and the performance of all stock items and suppliers. 

Connecting Sales, Inventory and Finance Data

When finance or accounting data is added to the sales and inventory mix, usually through a full ERP system, managers are able to leverage the data for other business functions that are related but not directly connected to inventory management. In addition to automating the recording of all financial transactions, the integration of finance data enables accurate working capital forecasting and better budgeting for procurement and promotions.

Supply Chain Integration and Inventory Optimisation

A retailer's inventory forms part of a larger and more complex supply chain. A modern IMS moves beyond simple stock-keeping by integrating with supplier networks and warehouse management systems. This creates a unified ecosystem where data flows freely, enabling businesses to optimise every stage of their operations and view all operations from a unified dashboard.

Synchronising with Suppliers and Distributors

So far, we have talked about systems that monitor, track and analyse internal company data, however, inventory strategy can be further improved when suppliers and distributors are included in the process. The following are some of the ways that retailers can improve efficiency in collaboration with suppliers.

Real-Time Supplier Stock Visibility

We have already discussed how an IMS helps prevent running out of stock through demand forecasting and automated re-ordering. This process, however, makes the assumption that suppliers will always have stock on hand and be ready to deliver as soon as an order is received, which may not always be the case. 

A more robust inventory strategy should also take into account the supplier’s own stock levels. More advanced IMS and ERP systems are further integrated to provide real-time supplier stock visibility, allowing retailers to see what’s available from their vendors. 

Equipped with this additional information, retailers have even more information to aid them in making data-driven decisions on when to place new orders and how much of a product to keep in stock. For example, should a retailer see that a supplier is running low on a popular product, the retailer could decide to pre-emptively order more stock than they might otherwise have thought they needed. Not only does this further reduce the risk of running out of stock, but it can also play a strategic role in disrupting the supplies of any competitors that sell the same product.

Collaborative Planning, Forecasting and Replenishment (CPFR)

Collaborative planning, forecasting and replenishment (CPFR) builds on the concept of supplier stock visibility to create a two-way system that allows suppliers to proactively adjust their own stock levels based on the retailer’s expected sales. CPFR entails both suppliers and retailers sharing forecasts, demand plans and inventory data so they can jointly manage replenishment. This allows both the retailer and supplier further to optimise efficiency through reduced logistics and storage costs.

In this article, we will further explore Walmart’s Vendor-Managed Inventory Model, which utilises the CPFR concept.

Leveraging Just‑In‑Time (JIT) and Lean Inventory Practices

Just‑in‑time (JIT) and lean inventory are two related strategies that retail businesses can use to maximise efficiency and reduce costs to a bare minimum.

As the name just-in-time suggests, the JIT philosophy involves receiving goods at the last possible moment before they are needed. This philosophy is used by retailers to reduce holding costs and waste, but it is also used by manufacturers that require various materials to manufacture their products. 

The lean inventory philosophy focuses on eliminating any activity or process that does not add value, thereby stripping processes to their bare essentials. The JIT aim of reducing excess stock is an example of a lean inventory approach. Further on, we will look at Walmart, which provides an excellent case study of how these two processes can be implemented.

The Role of Demand Forecasting in Inventory Strategy

Demand forecasting plays an important role in inventory strategy. Retailers need to predict as accurately as possible which of their products will move fastest and how much new stock they will need to order. As we’ve covered, two of the biggest factors in lost profits are due to running out of stock or overstocking of less popular items. Demand forecasting tools look at historic sales data to pick up seasonal trends so as to allow data-driven decisions on inventory ordering rather than relying on guesswork.

Large retailers generate vast amounts of data each week and this can be used for very detailed demand forecasting across their network that considers the impact of all sorts of variables such as location, weather and special events. Some simple examples include higher sales of umbrellas or raincoats during rainy weather, higher sales of refreshments on hot days and holiday-specific influences such as higher demand for turkeys during Christmas or flowers on Valentine's Day.