Inventory management software frequently asked questions (FAQ)

Inventory management software can reduce inventory costs and improve customer service at the same time. Its ambitious goal is to help move the right amount of stock to the right place at the right time and at the lowest possible cost.

Inventory management software (also called inventory planning software) performs many simple tasks, such as tracking goods and orders. It can also build on that foundation to optimize inventory levels and locations, tap demand data and make recommendations. It has become a critical decision-support tool in many organizations.

With so many similar-sounding choices available, it can be hard to discriminate. Here are answers to some frequently asked inventory management software questions.

Q: What does inventory management software do?

A: The broadest definition of the term "inventory management software" would have to include ERP and MRP legacy software that records basic data on inventory. Advanced planning and scheduling (APS) helps manage the raw materials and components used in manufacturing, and warehouse management systems (WMSs) have analogous features for warehouse inventory management. Today, the term "inventory management software" denotes a distinct category of specialized tools for collecting and analyzing inventory-related information for planning purposes.

Q: How does modern inventory management software differ from other supply chain software?

A: Inventory management software typically includes forecasting and replenishment modules. Forecasting helps you balance target inventories and incoming supplies with expected demand. Replenishment helps determine the safety stocks that are needed at points along the distribution chain to satisfy orders at a given fill rate.

A subset known as inventory optimization software employs complex algorithms to recommend the best locations and quantities for meeting demand across the entire supply chain. "The benefit is a significant reduction of inventory without having to do a lot of structural change," said Nari Viswanathan, an Aberdeen Group vice president and principal analyst.

Inventory management software is available standalone or in ERP and supply chain management (SCM) suites.

Q: What is the difference between inventory management and warehouse inventory management?

A: Warehouse inventory management is the main purpose of a warehouse management system (WMS) as well as some more specialized tools. It controls and optimizes the movement, storage, and tracking of inventory in and around a warehouse. For example, this software can say when and where to "pick," put away and replenish goods. In contrast, inventory management software usually takes a broader view of inventory planning and optimization across many locations along the supply chain.

Q: What are some of the advantages of using inventory management software?

A: The quickest return on investment often comes from lower carrying costs. "We've pulled $8 million of inventory out of our supply chain just this year," said Jason Bates, supply chain manager at Quality Bicycle Products, a Minneapolis-area distributor.

When tightly integrated with separate demand planning software, inventory management software can improve sales forecasts with accurate, up-to-date information on available inventory.

Users and industry analysts report other benefits:

• Replenishment planning that tells managers when they can expedite or delay orders without negative impacts on customer satisfaction and inventory costs
• The ability to segment safety stock according to key business metrics, such as profitability and customer satisfaction
• Improved inventory visibility for salespeople, which gives them the confidence to promote products without fear of running out of stock

Q: What hurdles will my company face in implementing inventory management software?

A: Integration, data quality, and training will take the lion's share of your attention.

Separately-sold inventory management software must often be integrated into existing ERP and SCM systems, often at great expense -- and that's just the IT systems. Typically, separate inventory management and demand planning departments must also come together in collaboration. A formal sales and operations planning (S&OP) process, perhaps with supporting web portals, can facilitate this.

You might need to reformat legacy data or develop custom applications to collect new information to allow the inventory management software to do its job.

Users often need training in inventory management methodologies before being handed the software. "The 'training the trainer' philosophy is usually what works best," said Noha Tohamy, an AMR Research vice president.

About the author: Freelancer David Essex has covered information technology for BYTE, Computerworld, PC World, and numerous other publications and web sites.