How to choose an inventory management system?

Inventory management landscape is undergoing significant transformations. Over the last several years automation has changed the perspective of the retail business. As businesses and operations become more complex and developed, they require better and more effective inventory management solutions, better inventory planning and control.

Retailers are becoming increasingly demanding to keep up with the market, competitors and clients. No longer do they need just an inventory management tool, they need a multifunctional intelligent solution that adds value to their business.

However, the way businesses deal with their inventory has changed not a long time ago. In the 2010s companies were using spreadsheets. Each store formed its orders rather chaotically, without an inventory management strategy or methodology in place.

Today, the market has undergone a 180-degree shift: automation is reshaping business models, human jobs are being replaced with technology. Automated inventory management technologies can work better and more efficiently than humans, and here is why:

• People may get monetary incentives and rewards from suppliers for promoting particular products;
• People may focus on their personal KPIs rather than on organizational strategic goals;

For example, the operational team works to reduce write-offs. To achieve this target, they order less “risky, low demand” products and keep their quantities low. And vice versa, when people have their KPIs connected to sales, they may distort the assortment matrix and the whole distribution chain by manually reordering best-selling goods rather than low-demand ones.

These and other risks contributed to the active development of online inventory management systems which make use of technology instead of human power. The orders are being formed and sent without the need for any human interaction.

Online inventory management systems became the successors of Excel spreadsheets and built-in ERP system modules which worked on the basis of very basic min/max algorithms and were not applicable for different SKU categories. ERP software was not fully automated, and people were often using "old but good" Excel spreadsheets and manually influencing the order process. The software was used just to generate order stats to help people manually calculate order quantities for each SKU. It was time-consuming and ineffective. 

Related: How can liquor stores effectively manage their inventory?

Modern inventory management systems have revolutionized the way orders are made. Human element is removed completely. Automated software solutions analyze sales data for thousands of SKUs, track volatile demand and automatically choose the needed restock amount.

Sounds like a retailers’ dream, yeah?

However, without proper business process planning, no software solution can increase your profits.

Inventory management system and retail business

In retail business financial performance is determined by the magnitude of an operating cycle, the time lag influenced by inventory turnover rate and business credit (in other words, extended payment to suppliers). The greater this gap is, the more funds are available for operational activity and development.

Business credit (or extended, deferred payment) is given to reputable market players, so it depends on your company’s market value and the ability of your employees to communicate with vendors and suppliers.

Inventory turnover rate is the primary indicator of inventory management effectiveness. Inventory turnover is calculated based on the stock and sales data for a certain period of time showing the number of days/month until the next restock. Inventory turnover is also influenced by product matrix, assortment performance and of course, inventory management instruments used.

So, an inventory management system software is a set of retail business processes that are designed to keep a certain level of assortment matrix availability to serve customer demand. These business processes are:

• replenishment of store and central warehouse inventory. Including the goods of regular demand, promotional, seasonal products (taking into account all retailers and suppliers SC restrictions);
• analysis of inventory key performance indicators; 
• response to emerging problems;
• "what if" analysis, is a risk management tool that allows you to project key performance indicators when changing input parameters.

Let’s imagine a retailer operating 30 stores with an average of 5,000 SKUs. It means, we have to manage and control 150 000 items, each having its own demand, supply and category performance. To calculate restock quantities, each item, its demand and sales shall be analyzed.

This explains the need for an automated inventory management system that does all the calculations and analysis and presents the final “product” to the manager who now has time to devote his time to an analytical and strategic activity, work with KPIs and development.

Functions to pay attention to when choosing a new or upgrading a current inventory management system:

1. Generating correct order quantities for restocking, for each SKU in each store.
2. Demand tracking and analysis, consistent with seasonal/holiday/sales demand spikes.
3. Practical and user-friendly analytics for key inventory performance indicators.

Must-have features of an inventory management system:

1. High level of automation & quality UI/UX.

A quality inventory management system software can create customized priority task lists for each user. The user can track current levels of target inventory, have order and delivery schedules at hand, and have access to practical customized reports on surplus inventory, deficit, delayed deliveries, etc. What is more, the system can quickly react to the probable errors and promptly send the notification to the user. 

Usability and intuitive interface determine the effectiveness of the whole system. Employees of all levels shall be able to read and understand data, as well as quickly learn to work with a system. 

2. Adding value to a company's financial performance. 

How can an online inventory management system contribute to profit-making?

• by automated inventory tracking and restock calculation for each SKU in each store, by live inventory count and refreshing with the latest demand change, delivery schedule, packaging alterations, etc;
• by automated restock and reship within the company’s supply chain, assigning and sending orders to suppliers, warehouses, stores, cross-docking;
• by customizing restock quantities for the stores and distribution centers by analyzing seasonal demand, low-selling, perishable, promotional goods demand spikes.

Each product category is unique. When calculating restock and tracking metrics, the inventory management system shall analyze product features. For example, if you are selling dry goods, your inventory system has to manage:

• average daily demand;
• seasonal demand;
• planned promotions and sales;
• supplier reputation and reliability.

If you are selling fresh goods, you have to add these 3: 

• day-by-day demand spikes, depending on the day of the week;
• targeting and merchandising, availability of goods on the shelves for targeted customers;
• expiration dates.

The online inventory management system shall adapt its metrics to all its factors and have a fully customizable buildable algorithm to fit each business's needs and adapt to its goals.

For example, when a system forms an order to be sent to the main warehouse the algorithm shall include the following metrics:

• sales demand for each store;
• promo and sales activities for each store;
• seasonal demand;
• DC sales;
• other factors that may influence the order within a delivery leg.

3. Extra functionality for order forming and restocking:

• Optimizing order quantities (order cost, weight, pallets, product quantities). The system calculates and analyzes input and real-time data and corrects order quantities (increases if the supplier, for example, has a minimum order requirement and decreases, if there are any budget limitations on the outgoing orders).
• Splitting the orders to fit logistics requirements (vehicle carrying capacity/number of vehicles etc.).
• Using substitute products when making an order (substitutes are similar/interchangeable products that are simultaneously present in the assortment matrix).
• Keeping track of substitute products (if one of the products is already present in the assortment matrix and the client does not feel the difference and does not have any preference).
• Working with alternative additional suppliers.

4. Promotions and seasonal inventory management:

• Automated order calculations and restocking to respond to sales after the promotional/seasonal period is over.
• Analyzing seasonal demand metrics (this component varies depending on product/store/month/week/season).
• Analyzing holiday season logistics lags (Sometimes during high- or holiday season suppliers are not able to fulfill and deliver the orders. The system automatically keeps a record of such periods and sends your orders before such periods start. As a result, you are prepared and you do not have to place orders during the busy high season).
• Preparing for a promotion/sales season. The system automatically calculates inventory needed to respond to the promotion demand level.
• Real-time promotion demand tracking and correcting promotions. Flexible approach to promotion management can help to pause/stop promotion campaigns for certain products if they are not being sold effectively. 
• Accurate real-time demand tracking. The system analyzes sales data during promotion and corrects inventory levels accordingly.
• Keeping track of promotional additional supplier placements for different products.
• Mastering inventory levels at the end of a promotion (this functionality can be applied to any sales event, promotion campaign and manage in-out goods).
• Visual data representation and analytics. Data is presented clearly to compare and analyze sales and demand for each promotion/each product.

5. Troubleshooting and performance metrics control:

• Dynamic real-time analytics giving a "helicopter view" on all performance metrics: out-of-stock, overstock, turnover rate, availability, inventory carrying cost, sales rates.
• Indication of tasks that require immediate attention (for instance, decrease of inventory needed for a promotion).

6. Data control and transparency:

• Possibility to generate a list of overstock or understock, review order history and order movement, for each item in the warehouse in seconds to quickly react to any changes.
• Logging of changes made by users to the system.

7. Real-time analytics:

Flexible reporting tool to quickly and efficiently analyze lost sales, overstock, inventory availability and turnover, with the data filters for each warehouse, responsible employee, product type.

• Reports on each supplier's reliability, timeliness and order fulfillment.
• Inventory turnover and availability reporting.
• Like for like metrics tracking.
• Separate reporting tools for Fresh category products, current and ended promotions.
• User-made changes tracking (shows the changes made by each user).

8. Cross-platform integration and flexibility:

• You can use the system to log in from any device from anywhere in the world! 
• Flexible settings, that can be adapted to any business needs very quickly. You do not have to invest in hard code changes and additional programming. Flexibility is a new must-have of the 2020s.
• Easy and smooth integration with any reporting system.
• High operating speed.

9. Constant 24/7 technical support by the provider

Let’s sum up! When choosing an inventory management system, you should pay attention to:

• Restock algorithms performance and adaptiveness to market and demand volatility.
• Interface ease and usability.
• Flexibility and adaptation to your business needs.
• Real-time transparent analytics, performance and KPI tracking.
• Smart notification system for the employees who work with inventory, to prevent or quickly react to potential risks.

These functions are quickly becoming new industry standards in retail and inventory management. Inventory management systems operating based on these standards are at the heart of every successful retail business. Inventory automation is a key to achieving financial goals. 

How to reach your business goals? 

First, determine if your inventory management system complies with the industry standards. Do you have areas that shall be developed? They may become a point of growth for your business.

Modern software solutions are based on different methodologies however the best result can be achieved by combining pull and forecast mechanisms. This approach is being successfully used by the leafio automatic replenishment system to boost turnover rate, increase sales and achieve 100% transparency in analytics and reporting.