Inventory management is a critical capability for any warehouse-based distribution business. How do you select the best inventory management software? In this article we discuss the critical features that the best warehouse inventory management software delivers.
What is Warehouse Inventory Management Software?
Warehouse inventory management software is used to track, manage and control the products and materials stored within a warehouse. The best warehouse inventory management software records for each product in the warehouse the quantity of the product, where it is stored, what orders it is used to fill, what pending back-orders need that product, what its cost per item is, when it needs to be re-ordered and in what quantity, what PO is the product reordered on, and much more. In short, it tracks goods coming into the warehouse from purchase to storage, at one or more locations in the warehouse, through to the sale of the goods. Its purpose is to maintain accurate stock levels sufficient to fill customer orders and then to alert you to reorder when the stock runs low.
Why You Need Warehouse Inventory Management Software
For distributors inventory management is essential to maintaining accurate stock levels, optimizing operational efficiency, forecasting demand, and maximizing ROI.
- Maintain Accurate Stock Levels – Distributors are in the business of selling products out of inventory to customers. In order to be able to fill customer orders, you need to know what you have available to sell and when you need to purchase more. The inventory management system will ensure that you have what products you need available to sell and help you repurchase them before you’re out-of-stock.
- Optimize Operational Efficiency – When you purchase products for inventory, you need to store these products in the warehouse so that they can be efficiently retrieved to fill customer orders. You need to be able to get the products off the shelves efficiently then arrange to get them to customers. Customer demand changes and some products that were fast movers fall out of favor. The software should allow you to be able to adapt to these continual changes to optimize efficiency.
- Forecast Demand – Inventory management software tracks each product from the time it is purchased through to its sale to customers. You should be able to access this data history in reports and run BI (business intelligence) and data analytics against it to forecast demand levels for different products. This allows you to optimize your inventory to stock those products that are in demand and avoid those products that remain unsold.
- Maximize ROI – The distribution model incurs costs to purchase products for inventory, stores the products in a warehouse then sells them to customers to generate revenue. To maximize your ROI you need to “turn” your inventory as quickly as possible – that is purchase as little as possible, since this ties up capital, and sell it as quickly as possible. However purchasing products for inventory takes time and if you are out of stock when a customer places an order, you will likely lose the order and may also lose the customer. The inventory management system will give you tools to manage these competing needs and find the best balance to maximize ROI.
The Inventory Management Processes
Warehouse inventory management software typically defines several key processes that parallel the physical flow of products into and out of the warehouse. These are the basic processes that are provided for by the best warehouse inventory management software:
- Purchase Order Receiving – Involves receiving products ordered from suppliers or manufacturers and verifying the products delivered against the PO. It also entails checking that the right products were delivered and that these were all in good condition. Often, POs will be partially received through multiple shipments and the best warehouse inventory management software will be able to handle partial receipts, over receipts, cancellations, etc. Upon PO Receiving, the products update the inventory levels and are recorded in the General Ledger. The software should be able to capitalize the cost of the products together with any direct costs of the product required to get the products to your warehouse. These are often termed Landed Costs and can include things like freight, insurance, clearing, demurrage, import tariffs and so on.
- Purchase Order Put Away - Products are put-away to their specified bin/shelf locations in the warehouse. The assigned locations will reflect a variety of factors like how quickly the products move, how accessible they need to be, whether they need a forklift to put them away and retrieve them or not, whether they require cold storage or are perishable and so on. Assigning product locations can meaningfully affect the efficiency of subsequent picking operations. The best warehouse inventory management software will give you the data to correctly assign and refine product placements.
- Inventory Tracking – Products will all have product codes and sometimes serial numbers as well. The best warehouse inventory management software will accommodate products that may also be barcoded or have RFID tags. Using barcodes and RFID tags you can substantially improve efficiency and reduce data errors as the products are moved around. Inventory management will track, for each product, the inventory levels as the product is received on a PO, picked, packed, shipped, transferred to a different warehouse, etc., and where the product is after each move.
- Order Fulfillment - When orders are received, the best warehouse inventory management software will immediately determine if the requested products are in stock. If they are, the products are picked from their bin/shelf locations and then readied for shipment to the customer. Products can be picked order by order or by batch or using various other methods that improve efficiency. When picked the orders are packed then shipped. Typically, the warehouse operations to pick, pack, and ship orders are managed by warehouse management software (WMS). If the products are not in stock, the best warehouse inventory management software will back order them. They will then be held as back orders pending receipt of the products on the next PO.
- Drop Shipping and Cross-Docking – The best warehouse inventory management software will allow for linking customer special orders directly to POs. In this way the products may be either drop shipped or cross-docked. Drop shipping means that the products are delivered directly from the manufacturer to the customer. Cross-docking means that the products are received into the warehouse and then immediately sent to the customer. Both these practices reduce the need for handling and storing the products, reducing cost and improving efficiency. The best warehouse inventory management software should also allow use of linked special orders and POs to deliver products to customers just-in-time. This could be used to accommodate things like construction schedules or jobsite storage constraints.
- Demand Planning – The best warehouse inventory management software will have a full BI and data analytics capability. With BI and data analytics, you will be able to develop demand forecasts based on historical records of sales. You should also be able to evaluate what-if scenarios.
- Replenishment – As products are picked and shipped, inventory levels decrease. When products meet or fall below a prespecified reorder point, replenishment orders are generated. The best warehouse inventory management software will allow different methods to determine the amount to reorder. Typical options are a Min/Max methodology or an Economic Order Quantity formula that balances the carrying cost of inventory against demand. The reorder quantities will reflect a safety stock buffer, the lead time that it takes to get the reordered stock from the supplier into your warehouse, the use rate of the product, and the cycle time for placing POs with the supplier.
- Physical Inventory – You will need to periodically count the inventory to correct for data entry errors. Using the actual count you can reconcile this to the quantity in the inventory management system. The best warehouse inventory management software will allow for full counts or cycle counts. Full counts of all the products typically happen once a year or so. Cycle counts for specific products, product categories, or locations are done more frequently. Typically, the process of physical counts of the inventory is managed by warehouse management software (WMS).
- Performance Metrics – The best warehouse inventory management software will give you performance metrics. With these you will be able to assess warehouse efficiency, accuracy, and productivity. You will want to be able to classify your products using ABC and XYZ analysis. ABC classification focuses on grouping products by value. XYZ analysis classifies products by stable demand, variable demand and uncertain demand. You should be able to calculate order fill accuracy, order cycle time, inventory turnover rate, and fill rate. The best warehouse inventory management software will use this data to identify areas for improvement and process optimization.
Inventory management is perhaps the most critical capability for any warehouse-based distribution business. Without getting inventory management right, distributors will not succeed. The stakes are pretty high. Is your inventory management falling short of some of the features of the best warehouse inventory management software, described above? If so, it may be time for a change. Contact us to see what Accolent ERP cloud-based inventory management software can do for you.