You’re the owner of a thriving e-commerce company, 3PL, or warehouse business. To keep yourself sharp, you’re constantly reading about supply chain management best practices and new tech solutions.
Chances are good you've routinely read the terms “warehouse management” and “inventory management.” Maybe you’ve wondered what the difference is between the two.
While the terms are closely related, they’re not the same. It’s helpful to understand the differences and similarities between the two, especially if you’re in the market for a new software solution.
In this article, we’ll break down these two concepts, their similarities and differences, and tell you what to look for in a cloud-based warehouse and inventory management systems.
Differences and Similarities Between Inventory Management and Warehouse Management Systems
Inventory management tells you how much of each product you have in your warehouse, storeroom, or distribution center.
The purpose of warehouse management is to oversee and direct everything that happens within the facility. It centralizes information and provides location-specific data about your inventory.
This may sound like the same thing, but it’s quite different when it comes to deploying an inventory management system (IMS) versus a warehouse management system (WMS).
For example, if you want to obtain information about the number of iPods in your warehouse:
- An IMS will tell you that there are 200 iPods stored in your East Coast facility
- A WMS will tell you that there are 50 iPods in Bin A, 20 iPods on Shelf B, and 130 iPods in Storage Area C within your East Coast warehouse
If this is the case, why does anyone bother buying an IMS? Wouldn’t it make more sense to just use a WMS?
Not necessarily. An IMS and WMS are significantly different in terms of complexity. A small warehouse may not need all the functionalities of a sophisticated WMS. Instead, it may just need a way to quickly and accurately record incoming and outgoing inventory, centralize that data, and run reports on it.
A straightforward IMS will allow a business owner to:
- Easily conduct stock counts using mobile scanners and record inventory in a central cloud-based inventory management tool
- Account for sales by integrating with the company’s point-of-sale (POS) system so purchases are automatically taken out of the IMS
- Export inventory data for easy review and analysis
- Generate reports on inventory flow and support the establishment of data-driven safety stock levels
A WMS will do all of the above, in addition to providing enhanced inventory management functions. This includes the ability to:
- Replace mobile scanners with RFID technology
- Centralize and optimize inventory management activities like putaway, picking, and packing
- Manage, execute, and control warehouse automation technology like AS/RS and conveyor belts
- Integrate warehouse activities with other logistical activities like shipping and transportation for objectives like shipping optimization and cross-docking
How Does an Inventory Management System Add Value to Your Business?
Taking inventory is one of the biggest reasons to switch from manual stock-keeping and spreadsheets to an inventory management system (IMS). Mobile scanners are preferential to pen and paper tallying.
That said, improving the stock-counting experience isn’t the only way IMS solutions add value. They also enhance your ability to conduct more sophisticated inventory management exercises, including:
- Calculating safety stock using historical data
- Tracking cost of goods sold for your financial statements
- Calculating your inventory turnover ratio
- Conducting cycle counts based on ABC analysis
Calculating Safety Stock Using Historical Data
Your safety stock level is the amount of extra inventory you order as a cushion in case demand outstrips the usual supply. When there isn’t enough buffer, your business loses potential sales. When there’s too much of a buffer, called excessive stock or overstock, your business’s capital becomes tied up in inventory costs like storage and insurance.
In the early days of a new company, business owners tend to rely on gut feelings when setting their safety stock levels. As the business grows, “gut feeling” calculations fail. Instead, an IMS can conduct a statistical analysis based on your historical sales data to determine how much safety stock you need.
Tracking Cost of Goods Sold for Your Financial Statements
Your cost of goods sold (COGS) is how much money it takes to produce the products you eventually sell. This number includes all of the costs directly involved in producing the good, such as labor and materials, and excludes indirect costs like sales and marketing.
COGS shows up on a company’s financial statements and helps it determine its gross profits. In other words, it’s a critical variable business owners need to assess the financial health of their companies.
An IMS helps you track material costs and sales to arrive at an accurate number at year-end.
Calculating Your Inventory Turnover Ratio
Inventory turnover ratio is another important indicator of a company’s health, specifically its ability to manage and sell its inventory.
A high inventory turnover ratio spells good news for your company. A low inventory turnover ratio suggests poor management or lackluster sales.
The inventory turnover ratio also allows business owners to identify isolated problems. For instance, if most products within the business have a high inventory turnover ratio while one category has a low ratio, it could be a sign that those products are no longer popular.
Instead of consolidating and manipulating several spreadsheets, a cloud-based IMS can instantly generate reports on your current inventory turnover.
Conducting Cycle Counts Based on ABC Analysis
An IMS allows business owners to keep tabs on their stock and centralize their data. Nevertheless, it’s still important for warehouse managers to conduct physical counts to verify the data in their system.
Traditionally, comprehensive stock counts are conducted on an annual basis. The entire business or warehouse is shut down for a couple of days and workers conduct a physical count of everything in inventory. Alternatively, a business owner pays overtime for employees to stay overnight or work during a holiday when business is already low.
In both scenarios, the business owner loses money either through lost business or labor costs, making it challenging to conduct such counts more than once a year.
On the other hand, cycle counts can take place during regular operating hours. Instead of conducting physical counts of the entire warehouse, specific sections of the warehouse are counted in each phase.
An IMS supports frequent cycle counts by helping business owners determine which area of the warehouses they should direct their attention.
First, the warehouse owner decides which products command the most accuracy. This could be the best sellers because they’re moved most frequently. Other business owners may focus on the highest value items.
Once the priority area is identified, the IMS conducts an ABC analysis that creates different categories.
For example, Category A for best sellers, Category B for medium sellers, and Category C for low sellers. The warehouse then focuses its cycle count efforts on Categories A and B.
Without an IMS, business owners would need to conduct this analysis and scheduling manually, taking up valuable time and reducing the effectiveness.
How Do Warehouse Management Systems Add Value to a Business?
Warehouse management systems (WMS) are a turbocharged version of inventory management systems (IMS). Rather than simply telling you that a piece of inventory exists, a WMS tells you where that piece of inventory lives and how to move it efficiently through the warehouse.
As mentioned earlier, WMS software centralizes and optimizes key functions within your warehouse including storage, putaway, picking, packing, inbound and outbound logistics, process automation, and more.
Centralizing Information About Warehouse Operations
A WMS centralizes information about the movement of products, which is especially important in manufacturing environments. If your facility receives sub-materials and combines them to create end products, it’s important to know which stage in the manufacturing process you’re in.
In addition to streamlining warehouse operations, this kind of system empowers managers to offer great service for customers requesting information about their orders. For B2B warehouses and manufacturing plants, providing accurate and timely information is an important part of retaining clients and generating recurring business.
Optimizing Labor-Intensive Warehouse Processes
Running a successful warehouse requires a number of labor-intensive processes like putaway and picking. A WMS enables warehouse managers to streamline these processes in several ways, including:
- Walking path optimization: Sophisticated systems help warehouse managers determine the best paths employees should take while putting away products or picking orders.
- Warehouse waste reduction: A WMS can help business leaders identify areas of warehouse waste (e.g., motion waste, transport waste, waiting waste) and find ways to reduce or eliminate them.
- Diverse pick methods: As your warehouse grows, your pick methods should evolve, too. As a smaller business, discrete order picking (picking orders one at a time) is acceptable. But with time, you’ll need to embrace order picking methods that streamline your operation, like wave picking, which is a scheduled process. A WMS is necessary for executing optimized pick methods.
- 3D packing software: Warehouse workers spend a lot of time figuring out how to fit items into boxes. Or, they pack items into oversized boxes and waste expensive packing resources. WMS software with integrated 3D packing software shows workers which box to select and exactly how to fit items into it, saving valuable time.
Integrating the Warehouse Into the Larger Supply Chain
Your warehouse doesn’t exist in isolation. In reality, it relies on its supplier partners upstream, its retail partners downstream, and its transportation partners in between.
A WMS creates opportunities for greater integration throughout the supply chain. For example, your WMS can integrate with your carrier’s system. Then, when a new job is initiated in your WMS, your anticipated shipping volume is communicated to your carrier.
This way, your carriers have time to plan optimized routes for your truckloads, and you benefit from the cost savings.
In addition, WMS software enables smart order routing. If you fulfill orders from multiple warehouses, your integrated points-of-sale systems can automatically route orders to the warehouse that has the item a customer wants, eliminating manual interventions that cost time and money.
Automating Your Warehouse Processes
Automating your warehouse requires a WMS equipped with a warehouse control or execution system. These tools allow you to deploy and manage tools like automated storage and retrieval systems (AS/RS) and conveyor belts. While these are pricey investments, and typically suited for warehouses managing a large volume of bulk goods, they can introduce huge cost savings.
Multi-Warehouse Inventory Management
Your WMS can help you manage inventory across several locations, centralize data across multiple warehouses, and direct transportation between facilities.
Future Proof Your Business with a Warehouse Management System Boasting Inventory Management Capabilities
There are important differences between warehouse management systems and inventory management systems. Once you understand the distinction, it’s easy to determine which solution is best for your business.
For retailers operating a large storeroom, an inventory management system is best. Cloud-based inventory software can help your staff quickly and accurately record inventory as well as instantly update stock information by integrating with your point-of-sale system.
For business owners operating a large warehousing operation, a warehouse management system provides the overall functionality required to not only track inventory, but move it efficiently through the supply chain.
Interested in a system that supports both inventory management and warehouse management? Schedule a Logiwa demo today.
Written by Ruthie Bowles
Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.