The Structure of an Inventory System

by Devra Gartenstein; Updated September 26, 2017
Warehouses depend on inventory systems.

An inventory system is a strategy for keeping track of the stock that a business has on hand. Because most companies use and sell their inventory on a daily basis, inventory systems must be regularly updated. Inventory systems can be manual or computerized. Their success and usefulness depends on their ability to monitor supplies in ways that make company operations more profitable and less stressful.

Tracking Incoming Inventory

An inventory system relies on a thorough and accurate process for tracking supplies as you receive them. Supplies are often stored in a storage area or warehouse initially, before being stocked in a retail store or being used to fill customer orders. An inventory system should track product as your company receives it and add the amount of new product to the amount you have on hand. Some computer systems do this automatically. Their accuracy depends on your thoroughness in reconciling the amount you ordered with the amount that is delivered when there are discrepancies.

Tracking Stock on Hand

Tracking stock on hand requires maintaining current records of what your company has left over from previous orders, as well as how much it adds to this stock through incoming orders and how much it uses up of its stock through sales and shrinkage. A successful inventory system will compile this information using records, such as delivery invoices and sales receipts, and also verify its accuracy by visually counting supplies on hand. Investigate discrepancies between these two sets of numbers in order to identify weaknesses in the system.

Tracking Shrinkage

Shrinkage is the process of losing inventory due to circumstances other than sales or use in a routine manufacturing process. Employee theft causes shrinkage, as does waste and breakage. Companies that work with perishable foods have a higher rate of shrinkage than businesses that deal with items that last. Shrinkage accounts for much of the inevitable discrepancy between the amount of inventory your company should have based on its invoices and sales records, and the amount that it actually has. Tracking shrinkage enables you to identify and address problems of losing useful stock at an unsustainable rate.

Placing Orders

An inventory system should provide much of the information that your company needs to place orders and replenish supplies on hand. If your inventory records show that you had 30 widgets, and you sold 20 in a week and another two broke, this information helps you to decide to order 22 more widgets, assuming you want to start off each week with 30 widgets on hand.

About the Author

Devra Gartenstein is an omnivore who has published several vegan cookbooks. She has owned and run small food businesses for 30 years.

Photo Credits

Cite this Article A tool to create a citation to reference this article Cite this Article