How is Inventory Tracked?

Inventory tracking refers to the processes involved in accounting for every piece of inventory being held in a storage space for the entire time that it is there. Inventory tracking gives you better visibility of your products, helps you forecast your future demand, and can even help you weed out errors before they become potentially bigger issues.

Originally, the only way to track inventory was to do it manually. If done correctly and accurately, this is an adequate and cost-efficient (albeit time-consuming) way to keep an eye on your inventory. While manual tracking is still used today, technology has given us a lot of other options to use as well. These methods may not all be applicable for every business however; what may work for one business may not work for another. Factors like the type and size of the business, as well as the products being tracked, determine what method may work best. This guide will discuss the manual and automatic methods of tracking inventory, as well as their pros and cons.

Manual tracking methods

Manually tracking inventory means there is little to no usage of technology to keep track of each piece of inventory in as close to real time as possible. This method aims to not only collect data about your inventory’s location, quantity, and movement, but to also quickly update the data after there is a change in even one of these attributes. Since inventory tracking software is a costlier investment that new and small businesses may not be ready to take on, manual tracking provides a cost-efficient alternative. These methods are commonly used by businesses that have a smaller quantity of inventory which can easily be tracked without the need for tracking software.

Manual tracking

There are several ways of manually tracking your inventory, here are a few:

1. Card system: The card system, also referred to as Cardex, is where products of the same type are stored together and assigned a card containing details about the product like its location, quantity, and product description. Every time there’s a change in one of these factors, the card is then updated. For instance if a certain number of products are removed from the group, the quantity mentioned on the card is reduced. With a card system, every product is accounted for, along with the other products of the same type. This method makes it simpler to track, since data is calculated one group at a time, which is comparatively less than all the products being stored.

2. Pen and paper method: With the card system, every group of products of the same type were assigned a card which was updated with the data. The pen and paper method uses one master data sheet that contains data about all the products in storage. This sheet is continuously updated as often as possible. With the pen and paper system you will be able to access all the data about your products in one place, instead of having to go to where each product is stored.

3. Spreadsheets: The spreadsheet method is similar to the pen and paper method, except here, a computerized spreadsheet is used to track inventory. Even though the data is maintained on a digital copy, the spreadsheet method is still considered a manual way to track inventory as whoever is maintaining the sheet will have to manually enter the information themselves. Computerized spreadsheets can be stored, saved, and retrieved on a computer or mobile device, so misplacing or damaging the sheets is not usually a concern.

Manual audits

Manual audits usually mean you frequently inspect and evaluate all of your inventory on a routine schedule that works for you. Some choose to conduct these audits a few times a day, others choose a few times a week depending on the type, quantity, and value of stock they hold. Businesses with less inventory of smaller value may audit at longer intervals, and those with more quantities that are worth more may audit more frequently. The actual audit consists of recording the location and quantity of inventory you have stored for each SKU and the movement of stock (inflow and outflow). This data is then compared with the data collected from previous audits and further evaluated.

The major questions an audit aims to answer include:

1. Has all the inventory been accounted for? 

2. Has any stock gone missing? 

3. Did we have enough stock to fulfil our orders?

4. Did we overstock and have too much stock leftover?

5. What products are we selling quickly, or what products are in demand?

6. Do we have slow-moving products? What are they and why might they be slow-moving?

Advantages of manual inventory tracking

Manual tracking can be very cost efficient and doesn’t require many tools to conduct, which is why these methods are preferred by businesses that are small or just starting out and are not yet ready to invest in a costly automatic tracking system. Most manual methods literally only require a pen and paper or spreadsheet, and your inventory ledger, which is a document that tracks all of your inventory transactions.

Since these methods are very simple and straightforward and don’t use a complex system, they’re easy to understand and require very little training to learn how to be used.

Disadvantages of manual inventory tracking

Manual tracking is also a time-consuming process, since you have to evaluate your entire inventory one item at a time. How much time it consumes depends on your inventory, which is why this drawback doesn’t have much of an impact on smaller businesses who don’t work with large quantities of stock.

Manual tracking also includes higher chances of human error. The more inventory items a business has, the more time it will take to track each one, which leads to a greater chance of mistakes like missed items or incorrectly recorded transactions.

Computerized inventory tracking system

Computerized inventory tracking systems are generally software solutions or appliances specifically designed to help track and control inventory. These systems are used when tracking inventory manually becomes too difficult to manage.They can range from a small system designed with one particular tracking task in mind, to a complete system that tracks inventory in the process of taking care of bigger tasks. Here are some popular computerized tracking systems:

Barcodes

Barcodes are one of the most popular tracking mechanisms. They’re attached to each item in the form of a sticker or stamp, and if scanned using the laser in a barcode scanner, you can view all information relevant to that product: location of other such products, the number of such products sold in a given time, the number of items remaining in stock, current item prices, and product descriptions. Barcodes are very common and used in places where inventory is being moved quickly because a quick scan is enough to track each item. Most warehouses use barcode scanners for their receiving processes to update their stock levels with the incoming inventory, as well as during order fulfillment to keep track of outgoing stock as well.

RFID

RFID (Radio-frequency identification) tags are similar to barcodes, but a little more advanced. They use radio frequency technology and store their information on a microchip, but unlike barcodes, this info can be modified and written over. RFID tags are also sturdier than barcodes, which is why they are predominantly used in the shipping and logistics industry where inventory is moved very quickly and not always handled gently.

Inventory management system

Inventory management systems, or inventory software, are computerized solutions that help businesses track, organize, and oversee all of their inventory and inventory-related processes. Inventory software solutions usually offer inventory tracking as a built-in feature. This feature is typically called “stock management” and makes it easy to update your stock levels every time a batch of inventory arrives or leaves your storage space. Inventory software also helps you track and update each item’s location so you always know where your items are. Inventory management systems are typically used by businesses that deal with a high number of fast-moving SKUs or wide variety of stock.

Advantages of computerized inventory tracking systems

When inventory tracking systems are computerized, it means that your tracking processes can all be taken care of quickly, accurately, and most importantly, in real time. This is because there is much less manual work involved and your system will be in charge of monitoring your stock and keeping your data updated. This can ensure you always have an updated inventory, which helps you keep a sufficient amount in stock to fulfill orders and avoid running out.

With time, collecting data about your stock, inventory movements, and sales at different times in a year will gather enough information for your system to be able to predict your demand. This is called inventory forecasting, and the more data your system has, the more accurately it can forecast your demand.

Disadvantages of computerized inventory tracking systems

While prices depend on the features the system offers, computerized inventory tracking systems can be quite expensive, especially when compared with manual systems. For instance, a barcode system typically costs around $1000 USD and an RFID reader costs a little more, around $1,500-$3,000 USD. Inventory management systems, on the other hand, can range between $50-$300 USD per month.

Selecting the right inventory tracking system depends almost entirely on the type and size of your business, as well as the inventory you work with. Both manual and automatic tracking methods have their share of strengths and flaws. While manual tracking can help you save on costs and gives you more control over how and what you track, it is also time-consuming and more prone to errors. Similarly, even though automatic tracking is quicker and more efficient, it does come with a price tag, which can sometimes be too large for small businesses. To help you decide what method you’d like to go with for your business, try to understand how each one would impact your business and choose the better fit.