What is Inventory Tracking? Methods, Challenges, & Systems

Multiple Warehouse Inventory ManagementEffective inventory tracking is a critical component of inventory management. It gives you the accurate data you need to make the best decisions for your brand, and positions you to meet customer expectations while reducing the cost of doing business.

There are two main ways businesses can track inventory: manually, using spreadsheets and logbooks; or automated, using inventory software systems.

Here we look at several key inventory tracking methods and inventory tracking systems, and explore a few inventory optimisation techniques you can use to improve your inventory tracking today.

What is inventory tracking?

Inventory tracking refers to the activities and processes implemented to monitor the quantity, location, and status of all the products or materials a business sells or uses. Inventory tracking is an important element of inventory management because it helps you to optimise your supply chain, reduce costs, and increase revenue.

With the use of inventory tracking systems and methods, you can monitor the quantity and location − along with the accuracy, value, and movement − of inventory throughout your supply chain.

Inventory tracking also helps you to prepare business financial statements, calculate your inventory turnover, and manage customer returns and damaged goods.

Why keeping track of inventory matters

Inventory tracking is important for several reasons:

• It improves your inventory levels, helping you to avoid overstocking or understocking. By accurately tracking your inventory, your stock levels can be optimised to prevent you from holding too much or having too little inventory stock, which can affect your cash flow and the profitability of your business.
• It can enhance customer satisfaction and loyalty. By keeping account of the products in stock and current demand, inventory tracking ensures that the products customers want are available when they want them and that they are delivered on time. This can increase customer trust and retention, as well as reduce your inventory costs and waste.
• It helps to reduce inventory shrinkage and loss. Inventory shrinkage can result from theft, damage, product use-by or expiration dates. By minimising it, you can also improve customer satisfaction, operational efficiency, and profitability.
• It helps you to meet any legal and regulatory obligations. Inventory tracking is essential for meeting the laws that apply to your business, such as paying taxes, conducting audits, and ensuring safety standards.

By using inventory management software or systems, you can automate and streamline your inventory tracking processes and gain valuable insights into its performance and efficiency.

Inventory tracking challenges

Keeping track of inventory is essential for healthy operations. However, there are some common challenges that you could encounter when tracking stock within your business. Here are some of the main ones.

1. Tracking consistency

Many businesses rely on manual or outdated methods to track inventory which can lead to errors, inaccuracies, and inefficiencies. A central system that automates your inventory tracking can help you avoid these problems. Inventory tracking software also provides you with real-time visibility into your stock levels.

2. Supply interruptions

There are numerous external factors such as natural disasters, politics (tariffs, embargoes, sanctions), and global pandemics that have the potential to disrupt your supply chain. These interruptions can affect the products' availability and quality, resulting in extended lead times and higher costs.

A robust inventory tracking system can help you mitigate these risks by providing par-level alerts, more accurate forecasts, and practical contingency plans.

3. Limited visibility

Tracking inventory isn’t just about knowing how much stock you have available to use or sell; it’s also about knowing where your inventory is located and in what condition.

Without adequate inventory visibility, you may face challenges in finding, retrieving, or delivering goods to your customers. A comprehensive inventory tracking system can help improve your inventory visibility with the use of barcodes, RFID inventory tracking tags, or GPS trackers to identify and locate your products.

4. Customer expectations

Today’s consumers expect personalised services and fast, accurate delivery of products from businesses.

Customers want to know product availability, price, and delivery times of the goods they are looking to purchase. They also want the ability to track their orders from point of purchase through to delivery, and to receive notifications about dispatch and shipping movements of their orders.

Accurate inventory tracking is essential for tempering customer expectations and improving customer loyalty.

5. Surplus stock and stockouts

Balancing inventory supply and demand is a major challenge for any business.

Overstocking can lead to high storage costs, inventory waste, and obsolescence. Understocking can lead to stockouts, lost sales, and unhappy customers.

A smart inventory tracking system can help you optimise inventory levels by using data analysis, demand forecasting, and replenishment strategies.

Benefits of accurately tracking inventory

When it comes to inventory tracking, accuracy is key.

You need to know exactly what’s available – and what isn’t – so that you can make the right purchasing decisions and avoid disappointing customers.

Some of the key benefits of accurate inventory tracking include:

• Optimised stock levels: Accurate inventory tracking reduces the risk of stockouts, overstocking, and spoilage, which can affect customer satisfaction and profitability.
• Better order management: Keeping track of your stock improves the accuracy and efficiency of order fulfilment, invoicing, and reporting, which can save time and money.
• Improved decision-making: Tracking inventory correctly enables better planning and forecasting of inventory needs, which can help you optimise inventory levels and cash flow.
• Easier business reporting: It provides valuable insights into customer demand, sales trends, and inventory performance, which can inform strategic decisions and improve competitiveness.

In addition to these nice-to-haves, inventory tracking is also essential for accurately updating your financial records and meeting sales tax obligations.

Inventory tracking methods

Inventory tracking methods are systems that help businesses keep track of products, assets, and supplies. There are different types of inventory tracking methods, such as barcode inventory tracking, RFID tags, and QR code inventory tracking.

Each method has its advantages and disadvantages, depending on the needs, budget, type, size, and scale of your business. Choose the method that best suits your needs and goals.

Barcode inventory tracking

Barcodes are a way of encoding data in a visual pattern that can be scanned and decoded by machines. Barcodes use a series of black and white bars to represent data, such as product name, price, or SKU serial numbers. They are a simple, inexpensive, and versatile method that can be used across various products and industries.

There are two main types of barcodes. One-dimensional barcodes consist of a series of vertical lines of varying widths that represent numbers or letters. Two-dimensional barcodes use a matrix of dots, squares, or other shapes to encode more information in a smaller space.

A barcode scanner reads the stored data and sends it to a database for processing. Both types of barcodes have advantages and disadvantages, and different industries may prefer one over the other depending on their needs.

Some limitations of barcode inventory tracking are:

• Requires a line-of-sight between the scanner and the barcode
• Barcodes can only be scanned one at a time
• Barcodes can be damaged by dirt, moisture, or wear and tear
• Only a limited amount of data can be stored on a barcode

RFID inventory tracking

RFID is a method of tracking inventory that uses radio waves to transmit data from a small chip embedded in a tag or label. An RFID reader activates the chip and reads the data without requiring direct contact or line of sight.

RFID is an advanced, accurate, and efficient method that offers benefits such as:

• Scan multiple tags at once, even from a distance or through obstacles
• Store more data than barcodes and update inventory in real time
• Tags and labels are more durable and resistant to environmental factors
• Provide security and anti-theft features

Some drawbacks of RFID inventory tracking include:

• More expensive than barcodes and require specialised equipment
• RFID are vulnerable to interference from magnets, liquids, or some metals
• There is a potential susceptibility to hacking or privacy issues

QR code inventory tracking

QR code inventory tracking uses a two-dimensional matrix of black and white squares to encode data, such as text, URLs, or images. A QR code scanner – such as a smartphone camera – reads the data and performs the desired action.

QR codes are a flexible, convenient, and interactive method that can offer advantages such as:

• Storing more complex data than barcodes or RFID tags
• Easily scanned by smartphones or other devices
• Linking to online resources or applications
• Supporting marketing or customer engagement activities

Challenges of QR code inventory tracking include:

• Requires internet to access some functions
• QR codes can be affected by lighting or poor image quality
• Expensive to implement in retail environments

What is an inventory tracking system?

An inventory tracking system is the tool or process a company uses to track inventory items as they move through their lifecycle from purchasing through to production, stock control, and sales. The purpose of an inventory tracking system is to help the business understand where stock is located, how much of it is available, and when more inventory needs to be reordered.

Choosing an inventory tracking system

When choosing which inventory tracking system is right for your business, consider your existing challenges, budget, and the workflows that it would be most beneficial to optimise.

Then translate those needs into product features to build your shortlist of ideal tools.

Finally, compare reviews, pricing, and customer support between your options to determine the best system for your business.

Key features of effective inventory tracking systems:

• Real-time inventory tracking – Also known as perpetual inventory management, real-time tracking allows you to maintain accurate stock records around the clock by automatically updating inventory levels as stock moves through the supply chain.
• Barcode scanning integration – Barcode scanners help you automate the inventory tracking process and improve stock accuracy to reduce order picking and stocktaking time, minimise errors, and streamline inventory management.
• Purchasing and supplier management – Inventory tracking systems with purchasing and supplier management functionality help you synchronise sales and replenishment with stock control to ensure you never run out of stock or order too much of it.
• Serial number and batch tracking – These features improve inventory traceability across the entire supply chain by enabling you to track the history of every single item in your inventory, making handling customer returns, product recalls, and warranties a fast and easy process.
• Bill of materials management – For manufacturing organisations, BOM management is an essential feature that helps you track raw material and work-in-process inventory, helping you understand exactly what's needed and what's available for each production job.
• Multichannel integrations – If you're selling products through more than one online or offline channel, multichannel inventory tracking is essential because it helps synchronise stock levels across all those sales mediums to prevent overselling and underordering.
• Multiple warehouse support – Businesses with multiple inventory locations need to know how much stock is available in all of them so they can fulfil orders from the appropriate place, improve customer satisfaction, and optimise purchasing.
• Reporting and analytics – Inventory reporting is essential to decision-making for product companies, as it helps you analyse and predict sales demand to inform procurement and marketing strategies.

Types of inventory tracking systems

The two main inventory tracking systems used by businesses are: inventory spreadsheets and inventory tracking software.

Here’s how they work:

Inventory tracking spreadsheet

A spreadsheet is a document that organises data into rows and columns. This method involves using a computer program like Microsoft Excel to record and update inventory data.

You can use a spreadsheet to store information about your products, such as name, price, quantity, and location. Using spreadsheets is a low-cost way to track your inventory, but it is a time-consuming manual task that can be prone to human errors and inefficiencies.

As a business scales, spreadsheet-based inventory tracking systems are typically replaced by software to save time, improve operational efficiency, and increase inventory accuracy.

Inventory tracking software

Inventory tracking software automates manual inventory management processes and integrates your various inventory tasks, such as ordering, receiving, storing, and order management.

Automated systems are a more efficient option than using spreadsheets because inventory tracking software can scan barcodes or QR codes on inventory items to track their location and quantity with perfect accuracy.

While this is a convenient and fast way to track your inventory, it can be more expensive and complex to implement and may require additional hardware and internet connectivity.

What’s the best way to track inventory?

The best way to track inventory is with inventory software tools that help you effectively manage inventory levels, orders, sales, and deliveries. Unlike spreadsheet inventory tracking, which relies on manual data entry and calculations, inventory software automates these processes and provides real-time insights into inventory performance.

Inventory tracking optimisation techniques

Inventory optimisation techniques ensure stock control is managed efficiently by implementing tools, technology, processes, and techniques to track inventory in real time, better forecast demand, and optimise storage.

Some of the optimisation techniques that can be used for inventory tracking include:

• Demand forecasting – using historical data to estimate future demand for your products and make better-informed supply decisions.
• Inventory policies – setting the rules and parameters for how much inventory to keep at each stage of the supply chain. These should be based on factors such as demand variability, lead time, service level agreements, and replenishment frequency.
• Replenishment – whether moving products from inventory storage to picking shelves, or receiving more inventory from suppliers, your replenishment strategy should ensure goods are being restocked at the right time to meet demand, prevent backorders, and avoid delivery delays.
• Linear programming – an optimisation technique used to find the best solution for a problem that has many variables and limits. For example, linear programming can help you decide optimal order quantities such as how much and when to order different items for your inventory, given ordering costs, how much you sell, how long products take to arrive, and space and holding costs.
• Integer programming – a way to find the best solution for a problem with numbers. It considers the space, the demand, and the cost of moving things. For example, integer programming can be used to determine the optimal allocation of items to different locations in a warehouse, given the space, demand and transportation costs.
• Dynamic programming – used to solve problems that have a repetitive or recurring structure, where the optimal solution depends on the optimal solutions of smaller subproblems. For example, dynamic programming can determine the optimal inventory policy for a multi-period problem, where the demand, cost, and inventory level vary over time.
• Simulation – an inventory optimisation technique that can be used to model and analyse complex systems that involve uncertainty, randomness, and variability. For example, simulation can be used to evaluate the performance of different inventory strategies under different demand scenarios, lead time, cost, and customer service levels.

Here’s how these optimisation techniques can be applied to various practical applications of inventory tracking across different industries: