How to Create a Simple Inventory Management System

If you manage or work for a business that deals with physical products, mastering inventory management is absolutely crucial for success. 

Proper inventory management ensures you can meet customer demand without tying up capital in excess stock or losing sales due to running out of products. 

The good news is that creating a reliable and effective inventory management system doesn’t have to be complicated or expensive, even if you are a small business with a limited budget. With some thoughtful planning, you can create a system that not only works for your business today but that can also grow with you.

Here’s what you need to know.

What is an Inventory Management System?

An inventory management system is a set of tools or processes that a company uses to track, control, and organize the flow of goods through its supply chain. It captures detailed information on every inventory-related transaction, including purchases, sales, returns, and transfers. This helps the company maintain an accurate account of what is available, where it’s located, and how it is moving through the supply chain.

The main objective of an inventory management system is to ensure that a business always has the right amount of stock, in the right place, at the right time.

Inventory management systems can range from simple paper-based logs and spreadsheets to sophisticated software solutions that automate various tasks, such as stock tracking, order fulfillment and replenishment.

Benefits of an Effective Inventory Management System 

• Improves inventory accuracy: A good inventory management system reduces errors in tracking and counting goods. It functions like a super organized assistant that counts everything in your inventory almost perfectly. This accuracy is crucial because it allows businesses to make good decisions, like when to reorder or how much to produce, based on real-time, reliable information.
• Prevents stockouts: An efficient inventory management system helps guarantee you consistently have enough products to meet customer demand. It helps you see or predict when you'll need more products so you can order them in time, ensuring you always have what customers want. This keeps customers happy and loyal, plus prevents lost sales.
• Reduces excess inventory: Strong shop floor management solutions help prevent overstocking. This saves you money on storage, frees up cash that you can use for important things (like marketing or new product development), and minimizes the risk of products becoming obsolete or expiring before you can sell them.

Types of Inventory Management Systems for Small Businesses

Choosing the right inventory management system can make a big difference in how smoothly your business runs. But not every system fits every business. The best choice depends on factors like your sales volume, inventory complexity, and available resources.

Below are four common types of inventory management systems that small businesses can consider, each with its own strengths and ideal use cases.

Perpetual Inventory Management System

The perpetual inventory system updates your stock records every time you make a sale or receive new inventory. This gives you an ongoing, real-time view of what’s in stock without needing to do manual counts constantly. The perpetual system is ideal for businesses with high sales volume or rapid inventory turnover, such as retail stores and e-commerce operations, where up-to-the-minute data is critical for operational efficiency and informed decision-making.

Periodic Inventory Management System

The periodic system is simpler and involves checking your stock at regular intervals, such as weekly or monthly. You manually count your items and update your records accordingly. This approach is low-cost and easy to manage, but it means your inventory data isn’t always up-to-date. It can work well for businesses with lower sales frequency or less complex inventory.

Barcode Inventory Management System

A barcode inventory system uses unique barcodes to identify and track products. When an item is moved, sold, or received, its barcode is scanned, and a corresponding inventory software or tool updates the records. The barcode inventory system is often used as part of a perpetual inventory system to enhance speed and accuracy.

RFID Inventory Management System

Radio-Frequency Identification (RFID) is an advanced tracking technology that uses radio waves to automatically identify and track tags attached to products. A key advantage over barcode systems is that RFID tags do not require a direct line of sight for scanning, and multiple items can be scanned simultaneously. This makes RFID highly efficient, especially for businesses managing large inventories.

Step-by-Step: How to Create a Simple Inventory Management System

As mentioned, creating a practical inventory management system doesn’t have to be complicated. Follow these six steps to create a simple inventory management system that gets the job done.

Step 1: Define Your Inventory Needs

Before you begin building your inventory management system, assess the nature and scope of your inventory. What types of products do you stock? Are they perishable, high-value, or bulky items? How frequently do you receive shipments, and how often do you sell or use inventory? Do you operate from one location or multiple warehouses? 

Answering these questions will help you determine the most suitable system type and the essential features it must include.

Step 2: Choose the Right Inventory Tracking Method

Based on your needs, choose a tracking method that fits your scale and budget. 

For instance, if you run a very small business with only a few products and low sales activity, then a basic system, like manually counting items every week or month (periodic system) might suffice. For businesses with higher inventory volumes or fast turnover, a perpetual system using barcode or RFID technology can provide better accuracy and speed.

Step 3: Select an Inventory Management System Software

Next, choose software that fits your chosen tracking method and business workflows. Your options range from simple spreadsheets to dedicated inventory management platforms:

• Spreadsheets: For very small businesses or startups with limited SKUs, spreadsheets like Excel or Google Sheets can provide a low-cost, customizable way to track inventory. They offer flexibility but require manual updates and carry higher risks of errors as complexity grows.
• Dedicated inventory management software: This is a specialized computer software created specifically to help businesses keep track of their inventory more efficiently and accurately. The best inventory management solutions offer advanced features such as real-time stock updates, automated reorder alerts, barcode or RFID scanning capabilities, and integration with other business tools like WooCommerce, Shopify, Amazon, Square, Xero, and QuickBooks. .

Step 4: Set Up SKUs and Categories

Organize your inventory by assigning unique Stock Keeping Units (SKUs) to each product variant. SKUs serve as distinctive identifiers, making it easier to track and report on inventory. 

Alongside SKUs, group products into meaningful categories based on attributes such as product type, supplier, or storage location. This makes it easier to find products when searching your inventory or doing stock audits.

Step 5: Implement Processes for Stock Control and Updates

Develop clear procedures for how inventory will be updated and maintained. This includes steps for receiving new stock, transferring items between locations, fulfilling orders, and handling returns or damaged goods. 

Define who is responsible for each task and how data entry should be done to minimize errors. If using barcode or RFID technology, establish scanning protocols. For manual systems, set regular physical counts and reconciliation schedules to keep your records accurate.

Step 6: Train Your Team and Establish SOPs

Ensure all staff members understand the system and their role within it. Provide training and create Standard Operating Procedures (SOPs) to ensure uniformity of practices.

Furthermore, regularly review and update both your training materials and SOPs to accommodate any changes in your inventory, processes, or the tools you utilize.

What to Look for in an Inventory Management Software

When comparing software options, here are some of the inventory management software features and capabilities to prioritize.

Ease of Setup and Use

Look for software with an intuitive, user-friendly interface. This minimizes the time and resources required to train staff and facilitates rapid adoption. 

Go for a software that also offers a straightforward setup process, allowing for quick and efficient implementation without the need for extensive technical expertise or prolonged IT support. This enables your business to become operational with the new system much faster, and as a result experience its benefits sooner.

Real-Time Tracking and Alerts

Look for software that tracks and updates inventory levels in real-time across all sales channels and locations. This ensures your inventory data is always current, enabling you to make timely decisions about purchasing, fulfillment, and stock management. 

Additionally, select a solution that offers customizable alerts, such as when stock runs low or anomalies occur, so you can address them promptly before they impact other business operations.

Integration with Other Business Tools and Systems

Choose software that seamlessly integrates with your other business tools, including CRM, ecommerce platforms, POS, shipping providers, and accounting systems. 

Integration automates data flow between these platforms, saving time, reducing manual data entry errors, and ensuring your inventory data stays consistent and accurate across the board.

Analytics and Reporting

Find inventory forecasting software with comprehensive analytics and reporting features. 

Strong analytics and reporting capabilities can help you identify useful trends and patterns in your inventory data, such as which products sell quickly, which ones sit on the shelves too long, or how often you run out of stock. Such insights empower you to make smarter decisions about your inventory.

Scalability

Your software should be able to grow with your business. Whether you’re adding more products, expanding to new locations, or increasing your order volume, the system should be able to handle that growth without slowing down or requiring a full migration to a different platform.

Customization Options

No two businesses work the same. A good inventory system should let you customize workflows, dashboards, user roles, and even reporting fields to match your internal processes. 

Common Mistakes to Avoid When Setting Up Your System

When setting up your inventory management systems, there are several pitfalls and mistakes that you should watch out for. 

Not Defining Clear Inventory Needs

Jumping into setup without first having a clear understanding of your inventory volume, product types, and turnover rates can lead to choosing the wrong system. Take the time to assess your actual needs before deciding on the tracking methods or software to use.

Choosing the Wrong Tracking Method

Selecting a tracking method that doesn’t fit your business size or workflow, such as opting for a perpetual system without the infrastructure to support real-time updates, can cause confusion and errors. Match your method to your operational capacity.

Overcomplicating the System

Trying to implement too many features or advanced tools before you're ready can create more confusion than clarity. Simplicity is often more effective, especially in the early stages. Choose tools that match your workflow and scale up as needed.

Relying on Manual Processes for Too Long

While spreadsheets can be a useful starting point, clinging to them as your business grows can cause problems. Spreadsheets are prone to human error, lack automation, and can become unwieldy, limiting your ability to scale efficiently. Plan for the gradual adoption of dedicated inventory management software and other automated tools to keep pace with expanding operations.

Skipping Routine Audits

Regular physical inventory audits are essential, even if you use real-time tracking. Skipping audits can allow unnoticed discrepancies such as shrinkage, miscounts, theft, or damage to build up over time and compromise your data accuracy.

Wrapping Up: How to Create a Simple Inventory Management System for Your Business

As we’ve seen, building an inventory system doesn’t have to be complex. By following the steps we’ve outlined and steering clear of common pitfalls, you can create an effective and reliable inventory management system that keeps your stock organized and supports smarter decision-making.

If you’re looking for a powerful yet user-friendly inventory management solution built specifically for small and medium-sized businesses, check out Cin7. 

With premium features like real-time tracking, automated replenishment, comprehensive reporting capabilities, seamless integration with many other business tools like ecommerce and accounting tools and many more, Cin7 empowers you to take complete control of your inventory and make informed decisions that drive growth and success for your business. 

Schedule a personalized demo of Cin7 today to learn more.