Definition of inventory management system

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Definition of inventory management system
Inventory management systems should reduce stock holdings. (Getty Thinkstock)

Inventory management systems control stock levels and ensure that they are not held in excessive quantities and that they do not run out. Inventory is a buffer against failure of supply and so inventory management systems fit into the wider discipline of supply chain management. SCM aims to keep stock holdings as low as possible by improving the reliability of supply and the predictability of demand.

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Systems

You might think that the “system” in “inventory management system” implies a computerised system managing complicated inventories for large organisations. Many such systems exist. However, “system” can mean a paper-based system. Very small enterprises like a corner shop, or a carpenter’s workshop needs to manage inventory and these small businesses manage that task well, by a process of experience and intuition.

Simple system

The simplest inventory management system is the “two bin” system. A supply of items fills up two buckets, bins, hoppers, trays or jars. The size of the containers depends on the size of the item and the rate of turnover. The business policy on stock holding also determines the container size. If a business wants to hold larger stocks of items, because they are difficult, or expensive to fetch, or get delivered, then the containers will be larger. The basis of the system is two containers for quantities of each item. When bin one is empty you go out and buy enough stock to fill it. Workers can continue producing until bin one is refilled, because they are now running down the stock held in bin two. The system is set at the right capacity if bin one is filled before bin two runs out.

Evolution

Although the two bin system seems rudimentary, it was the dominant inventory management system that saw Britain through the Industrial Revolution and two world wars. It works. In fact, it is the fundamental principal underlying the Just-in-Time inventory management strategy that made Japan a world leader in manufacturing with tight inventory control. To this day, it is the central method of inventory management in "Kanban" production management, which is the name the Japanese give to their material requirements planning system.

Computerisation

All computerised inventory management systems continue the two bin system. The key factors behind these systems are “safety stock” and “reorder quantity.” Safety stock derives from bin two and reorder quantity was originally implemented by bin one. Even in the two bin system, the two bins did not have to be the same size, although, generally they were, because when bin one was refilled, it became bin two. Some systems use three or more bins. However, the principal aim of all inventory management systems is to shift to practices that allow safety stock to be eliminated and to reduce the reorder size to as close to immediate demand as possible.

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