What Is an Inventory Management System?

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Welcome to Manufacturing ERP 101 where you can fast track your understanding of ERP and assess its value to the continued success of your business.

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Inventory Defined

(Before getting into Inventory Management, it’s important to understand what the word ‘inventory’ means). There are three types of inventory to include: Raw Materials, Work in Process, and Finished Goods. Raw Materials are stock used to make an end product. Work in Process consists of the raw materials that are being made into finished goods. And, Finished Goods are the final products that get produced for sale to consumers.

ERP inventory management

What is an Inventory Management System?

Managing inventory is an important part of business administration. If you have excess inventory, money is being wasted (which is referred to as underutilization.) If you don’t have enough, it delays deliveries. Neither one is a good scenario.

An inventory management system tracks inventory availability at all points of your supply chain — from purchasing, to production, and finally sales to consumers. An inventory management system is important for companies with large amounts of inventory in order to keep it at optimal levels.

What is an inventory management system
How does a modern inventory management system work

How Does a Modern Inventory Management System Work?

Products get scanned using bar code or RFID (radio frequency identification) systems. This information gets sent to the Inventory Management System to keep track of how much product is being sold and what is in the warehouse.

The system supports electronic data interchange (EDI). EDI sends and receives data between two parties using data transmission lines, i.e. the Internet. It allows communication with vendors to buy materials.

How Does a Modern Inventory Management System Work?

Products get scanned using bar code or RFID (radio frequency identification) systems. This information gets sent to the Inventory Management System to keep track of how much product is being sold and what is in the warehouse.

The system supports electronic data interchange (EDI). EDI sends and receives data between two parties using data transmission lines, i.e. the Internet. It allows communication with vendors to buy materials.

How does a modern inventory management system work

Problems with Traditional Inventory Management

Traditional inventory management becomes problematic as a company grows. It includes supplier agreements to get discounts for consistent orders over specific periods. This often results in ordering more than needed to fulfill production needs. It can also lead to vendor lock-in, obligating you to long-term relationships with suppliers.

Traditional inventory management entails manually checking stock levels to know what is running low. This is time-consuming, prone to errors, and not efficient. To reorder inventory, your purchasing department has to call, email, fax, or use an online system. Again, this uses more employee time than an automated inventory system would.

Warehouses become necessary to store excess inventory. Items that are perishable, hazardous, or require refrigeration need special accommodations. These concerns create additional expense, along with warehouse personnel and theft protection.


7 Signs You Are Ready for an Inventory Management System

5 Signs You’re Ready for ERP

Why You Need a Modern Inventory Management System

Inventory is a big expense that must be carefully managed. It directly affects your customers — so knowing how much you have on hand at all times is essential. Since inventory levels change constantly, tracking them manually isn’t practical. Modern inventory management systems incorporate new technology to efficiently monitor inventory and manage the supply chain.

Lower cost

When you have optimal inventory levels, you won’t lose out on missed sales. A modern inventory management system tracks inventory in real time. It allows you to see what is selling well and place orders for more inventory before you run out. You can also set minimum levels to notify you when inventory is getting low and it is time to order.

Lower cost

With a modern inventory management system, you no longer rely on manual counts. It helps you keep up with change as your business grows. It keeps track of your stock in all locations and seamlessly integrates with other systems to scale operations.

Lower cost

It’s easy for people to miscalculate with manual inventory counts. That can result in too much or too little stock. When processes are automated, there’s less chance for human error. With an inventory management system, scanners can count inventory. The information gets stored for decision-makers to view. It reduces errors and increases efficiency, making inventory tracking faster and more accurate.

Lower cost

Having optimal inventory on hand allows you to fulfill orders on time. No more missing deliveries due to out-of-stock items. Thus, efficient inventory management improves customer satisfaction and retention. You can also add to your customer base with a better brand reputation.

Lower cost

With a modern system it's easy to locate items. You can organize your products based on demand for a more streamlined warehouse. With less time looking for things, your workers have more time to spend on activities of greater value for the company. Modern inventory management gives your purchasing department real-time synchronization of inventory receipts and levels. Replenishment orders get placed when needed.

Lower cost

Access to real-time inventory levels allows you to spot problems. At a glance you can see your safety stock, re-order points, cycle counts, and demand planning. You can also determine what’s on order and the due date of every production order. It provides analytics, revealing the most profitable products and the best sellers. You can also determine the location or time of year that has the best results.

Lower cost

Having too much inventory obliges you to shoulder the cost for items that are not used. Having too little inventory causes you to delay or even cancel customer orders. Either scenario costs your business money. Having the optimal amount of stock means you don’t have the expense of storing items. What is more, you don’t incur labor for manually counting or searching for products.

A modern inventory management system uses AI and machine learning technologies. It makes predictive analysis and demand forecasting more accurate. With this knowledge, you can get better pricing, since you’ll know how much and how often to order.


10 Inventory Management Best Practices for Manufacturers

To achieve the greatest results, it’s important to use best practices as described below.

Incorporate ABC Analysis

ABC Analysis is a method that keeps stock in a hierarchy to make it manageable. “A” items would be the top sellers. “B” would be the next level of priority. The “C” level would be those items that are low-priority and not ordered as often. This method will help keep your inventory organized and streamlined.

Get Your Pick and Pack Process in Order

Pick and pack involves laying out your warehouse for efficiency. Have the most used items closest to where they get packed. Keep the warehouse clean and organized. Double-check each order, and use barcodes or RFIDs on inventory to keep track of levels. If you use a warehouse management system (WMS), pickers are shown exactly where to find items.

Determine Your Inventory

Key Performance Indicators (KPIs) allow you to track activity and help you make decisions. Inventory carrying cost, write-off and write-down, rate of turnover, cycle time, order status, tracking, and fill rate are KPIs to watch.

Use Reorder Point Formula

A reorder point formula defines when to order more inventory. This formula is: (average daily unit sales x average lead time in days) + safety stock = reorder point. Using this formula will help you to keep only the necessary inventory in stock

Maintain Safety Stock

It’s good to keep a small amount of excess inventory. It helps to avoid running out if you have an influx of orders or a change in supplier lead time. Safety stock ensures you don’t lose customers or revenue from being unable to fulfill orders.

Calculate Inventory Turnover

It’s important to understand how demand affects product turnover. By using a formula, you can know what inventory is not moving and figure out how to get it sold. To calculate inventory turnover, use this formula: Cost of Goods Sold ÷ Average Inventory.

Optimize Inventory Counts

It’s important to optimize the inventory counting process. Schedule inventory counts when it is less likely to interrupt business operations. Make sure everything in the area is clean and organized. Also, know exactly what should get counted to ensure nothing gets missed.

Keep Inventory at Minimum

It’s important to keep tight control over your inventory. Low inventory reduces holding costs, allows for more space, reduces the risk of product obsolescence, and makes it easy to find items. Keep an eye on which products sell the most and make them easy to access. Review historical records of your safety stock levels to see if you need to make adjustments.

Maintain Good Vendor Relations

It’s important to have good working relationships with vendors. They are more likely to accommodate you if you run into a problem and need something quickly. Make sure your vendors are paid promptly and maintain good communications with them.

Install Modern Inventory Management System

An inventory management system is very important to your business. It removes error-prone manual processes and incorporates best practices. It helps improve operations throughout an organization.


Inventory Management System Functionality

Inventory management systems have many features, but the most common are below.

Warehouse Design Warehouse Design


Inventory control keeps track of items on the warehouse floor. It categorizes by type, location, and SKU. This helps to audit data, to generate reports, and to search, filter, and view products.

Inventory Tracking Inventory Tracking


Handles administrative functions and integrates with other software if needed.

Worker Performance Worker Performance


Inventory tracking keeps tabs on orders in transit, giving you end-to-end visibility into your supply chain. It integrates with your suppliers’ systems to automatically reorder items when supplies are low. It allows customers to receive information on what products are available and when.

Picking, Packing, and Shipping Picking, Packing, and Shipping


To make it quick and easy to track, the software integrates with barcode scanners to identify and label products.

Yard/Dock Management Yard/Dock Management


This part of the system allows you to take control of your inventory needs. It provides automated reports that show trends and changes to the supply chain. It keeps exactly the right amount of inventory on hand.

Yard/Dock Management Yard/Dock Management


Receive alerts when inventory falls below or rises above predefined levels. If there is a delay anywhere along the supply chain there is also a trigger. Having these notifications lets you reduce waste, manage costs, and keep customers informed.


Modern Inventory Management System Features

To get the most from an inventory management system, consider the following features. They will allow your business to compete in today’s fast-changing marketplace.



When you run on a cloud-based system, you do not have to use in-house resources to manage the software. The vendor provides support, automatic updates, and robust security. It scales as you grow and is less expensive than the up-front cost of an on-premises system.

Supply Chain Module

IoT Integration

It’s important to be able to use the technology that is at your disposal. Internet of Things (IoT) integration provides greater control and better reporting. It also allows digital labeling and tracking through GPS, Bluetooth, and RFID.

On Premise ERP deployment


Staff can use mobile devices to provide and receive real-time information on the go. Mobility provides greater efficiency and faster response times.


Demand Forecasting

Forecasting uses your sales and production history to predict demand. It helps with decisions on reordering inventory, scheduling staff for production, and whether to hire more staff.

On Premise ERP deployment

E-Commerce Integration

If you sell direct to consumers – or even business to business (B2B) – this is a very useful feature. E-commerce connects inventory management to online orders to keep stock current.


Machine Learning
and AI

Interact with e-commerce customers using chatbots powered by AI. They can provide information on product availability. Machine learning helps chatbots know what is in stock, or what a customer may like based on their purchasing history. This technology also helps better track and forecast inventory.


Choosing an Inventory Management System

The best way to know what your business needs from an inventory management system is to identify your problem areas. Once you have this information, it is easier to know what functionality you’ll need as you look for systems.

Material Requirement Planning Software

There are lots of inventory management systems on the market. Will you need to connect to other existing systems? If so, you’ll want to ask vendors if their system can integrate. You’ll also want to learn what’s involved with the transition, how the vendor will assist you in the change from manual to automated processes, and what level of training is offered.

You’ll want to understand all of the costs involved in implementing the new software. Make sure it can handle what you currently process while having plenty of room for growth. If you are connecting systems, your in-house IT will need to manage updates to ensure the systems continue to work together. Be sure your IT staff has the capability.

Determine any hardware costs, user fees, and upgrade or maintenance costs. Find out how much training they provide.


Modern ERP With Inventory Management

If you are looking to integrate many systems, it may make sense to consider an Enterprise Resource Planning (ERP) solution. An ERP system integrates all aspects of your operation – from planning to production to purchasing. Instead of connecting several different systems, you use one system and database. That way, you can manage your entire operation and optimize your inventory.

The most common ERP modules are Human Resources, Inventory, Sales/Marketing, CRM, Purchasing, and Finance/Accounting. ERP helps companies unify critical business functions and optimize operations. Its organization-wide visibility helps detect inefficient processes and reveals growth opportunities.


A Platform Play for OptiProERP with SAP Business One

OptiProERP chose SAP Business One, the #1 ERP platform for small and midsize businesses, for its ERP platform.

With SAP’s continuous platform innovation, we focused exclusively on innovating and developing our industry-specific manufacturing functionality.

This decision freed OptiProERP from the recurring cycle of platform updates that most ERP providers cannot keep current. Unlike SAP Business One, that invests more in research and development than all of the other ERP providers combined, OptiProERP could focus all of its resources into building advanced manufacturing functionality on a truly modern platform.

Instead of adding a layer of code on top of SAP Business One, OptiProERP is built into the DNA of SAP’s trusted ERP platform. The two perform as one because at the code level, they are one.

The result is a 21st century solution designed to help growing manufacturers gain full visibility and control of their business, reduce production costs, increase profit margins and leverage data to inform intelligent business decisions.

Innovative Manufacturing ERP With Inventory Management

OptiProERP is a complete manufacturing ERP solution embedded into SAP Business One. It provides business and manufacturing functionality, including robust inventory management features. OptiProERP is mobile-friendly and cloud-based. It provides demand forecasting, IoT integration, machine learning, and AI. OptiProERP also includes e-commerce and warehouse management modules.

See OptiProERP in Action

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OptiProERP Inventory Management Resources

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Inventory Management

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Data Sheet

Inventory Management

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5 Ways ERP Improves Inventory Visibility in Your Supply Chain

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