An Overview of the 4 Types of Inventory Management Systems

If your business has inventory, which it likely does, it needs to manage it well to prevent operational chaos and unnecessary spending. Here’s an overview of the four main types of inventory management systems. Each system reduces excess—but maintains sufficient—stock to meet market demands.

Just-in-Time Management

Just-in-time (JIT) management relies on producing or acquiring goods only as they are needed. This method minimizes inventory holding costs and reduces waste by ensuring that inventory levels match current demand.

Businesses implementing JIT often enjoy improved cash flow because they invest less capital in holding large quantities of stock. However, JIT requires precise planning and coordination with suppliers to prevent stockouts.

Materials Requirement Planning

Materials requirement planning (MRP) is a strategy that takes a more systematic approach to inventory management. It uses software that calculates the materials and components necessary to manufacture a product.

MRP systems consider lead times for each component, ensuring timely ordering and delivery to meet production schedules. This method is particularly beneficial for manufacturing businesses, as it integrates production and inventory control, improves resource allocation, and supports efficient production planning.

Economic Order Quantity

Economic order quantity (EOQ) is a method focused on determining the optimal order size for a company. EOQ takes into account demand rate, ordering cost, and holding cost to calculate the most cost-effective order quantity.

This approach enables businesses to reduce storage space requirements and inventory carrying costs. It can be particularly helpful for improving office inventory management as well as in warehouses.

Days Sales of Inventory

Days sales of inventory (DSI) is a financial metric that measures the average number of days a company takes to sell its inventory during a given period. It provides insights into how efficiently a business is managing its inventory levels and stock turnover.

For example, businesses with a lower DSI experience faster inventory turnover, suggesting efficient inventory management and strong sales performance. Monitoring DSI helps business owners make informed decisions regarding procurement and sales strategies to maintain a healthy balance between supply and demand.

Once you know about the four main types of inventory management systems, you can select one or create a combination for your business’s needs. Doing so will promote more efficient use of time and resources in your operations.