In the new retail era, inventory management is becoming increasingly complex, especially when it comes to multiple systems such as ERP, WMS, POS, etc. By clearly explaining the relationships and roles between these systems, the article aims to help readers better understand and optimize inventory processes, thereby improving supply chain efficiency and customer satisfaction.
When many supply chain products who are new to the industry first come into contact with the concept of “inventory”, there will often be a confusing stage of “feeling understood” and “not understanding”. Especially when it comes to multi-service systems, upstream and downstream systems need to be connected in series.
For example, we often talk about ERP, WMS, POS, plus various inventory terms that sound similar but not the same, such as book inventory, physical inventory, available inventory, in-transit inventory, etc., many friends are easy to be confused and even a little dizzy.
In today’s article, I would like to share with you the two core and most confusing inventory concepts in the new retail scenario – system book inventory and physical inventory. At the same time, it will also discuss how they are reflected in the core application systems of the enterprise (ERP, WMS, POS), and how these systems interact with each other for information exchange and business collaboration around inventory. I hope that through this disassembly, it can help you thoroughly clarify the logic behind these concepts, so that you can be more calm and confident in subsequent product design or project implementation.
1. System book inventory and physical inventory
System book inventory can also be called “system inventory”. You can think of “system book inventory” as the balance number displayed in your personal bank account. This number is not generated out of thin air, it is the result of every transaction record you deposit (corresponding to the warehousing in the system), withdraw money (corresponding to the outbound), transfer (corresponding to the transfer), etc., after the banking system accurately calculates.
In supply chain management, “system book inventory” refers to the theoretically existing inventory quantity calculated through the built-in logic of the system based on all recorded business documents (such as purchase warehousing orders, sales outbound orders, transfer outbound orders, transfer warehousing orders, profit and loss orders, etc.) in a supply chain system.
Compared with the “theoretical” nature of book inventory, “physical inventory” is much more. It’s like you open your wallet and count the amount of cash you actually have, or open your refrigerator and see with your own eyes how many eggs and bottles of milk are left.
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Therefore, “physical inventory” refers to the actual quantity of goods or materials that we can touch, see with our own eyes, and confirm the quantity through actual counting at the physical storage location of the enterprise, such as a specific warehouse position, on a shelf in a store, or even in a temporary storage area next to the production line.
The relationship between system book inventory and physical inventory
Ideally, the system book inventory should be exactly the same as the physical inventory, and each increase or decrease recorded in the system corresponds to the true flow of physical goods.
But the reality is that “consistent accounts” is a goal that is continuously pursued but extremely difficult to achieve perfectly in supply chain management. There will always be some differences between the numbers on the books and the actual quantities in the warehouse, which we usually call “account discrepancies” or “account mismatches”.
So, how exactly do these pesky differences come about? In fact, there are various reasons, which can be roughly classified into the following categories:
1) Process and operational errors: This is the most common category.
For example, when the consignee signs for the goods sent by the supplier, he neglects a few pieces, or the consignor picks up the goods for the customer because he is in a hurry to send one less box. Or, when entering the document, the system operator accidentally recorded the quantity “100” as “10”, or mistakenly recorded the warehousing list of product A on the head of product B. These human mistakes will directly lead to a mismatch between the books and the physical objects.
2) Loss or theft caused by management loopholes: If there are loopholes in the internal management of the enterprise,For example, if the security measures of warehouses and stores are not in place and the warehousing process is not rigorous, goods may be stolen or lost for unknown reasons. These unrecorded “abnormal” shipments will naturally lead to physical goods being less than the books.
3) Time difference and document processing delay: This is an important reason for temporary account differences.For example, a batch of goods has actually arrived at the warehouse and unloaded at 5 p.m., but due to the busy warehouse personnel, the relevant warehousing documents may not be entered and confirmed in the system until the next morning. Then, if you take stock of the warehouse at this node that night, you will find that the physical inventory of this batch of goods has increased, but the book inventory has not been updated, and the difference will appear.
Similarly, if the sales documents are not confirmed in the system in time after the sale leaves the warehouse, it can cause similar problems. Untracked internal circulation or use: In some cases, the consumption of goods is not recorded through the standard outbound process. For example, if the marketing department receives some samples from the warehouse for promotion activities, or the R&D department receives some materials for testing, if these receipts do not have the corresponding outbound documents to be processed in the system, then the physical goods are reduced, but the books still exist.
The system book inventory is the theoretical inventory “calculated” by the system based on all recorded business documents, which is an important reference for enterprise operation decisions. Physical inventory is the number of goods that can only be confirmed through actual inventory and actually exist in the warehouse or store. Differences between the two are almost inevitable due to operational errors, physical losses, management issues, time delays, and many other factors.
Although “account consistency” is an ideal state, in actual work, we need to understand the reasons for the differences, and continue to discover, analyze and correct these differences through effective processes and system tools, and strive to maximize the system book inventory and accurately reflect the real situation of physical inventory. This is not only the basis of inventory management, but also the premise for all subsequent optimizations and decisions.
2. Inventory in the common system of new retail
After understanding the two basic concepts of book inventory and physical inventory, let’s take a look at the core business systems we are familiar with in the digital system of new retail, usually including ERP, WMS and POS, how they each view and handle inventory. You will find that they play different roles in inventory management, both division of labor and collaboration.
ERP system inventory:As the central nervous system of an enterprise, ERP mainly manages book inventory. It focuses on the inventory status from a global perspective, including aggregated data such as procurement in transit, warehouse inventory, store inventory, etc. It usually does not directly participate in specific warehouse receipt and delivery operations or daily inventory of stores, but integrates with downstream professional execution systems (such as WMS and POS) to summarize various inventory change data reported by these systems.
For example, when WMS completes the purchase and warehousing, it will transmit the warehousing results to ERP, which will increase the book inventory of the corresponding warehouse; When the POS completes a sale, it will also transmit the sales outbound information to ERP, which will deduct the book inventory of the corresponding store. Similarly, when the WMS or POS conducts an inventory count and generates P&L adjustments, these adjustments are synchronized to ERP, which updates its books accordingly.
Therefore, from the perspective of the relationship with physical inventory, ERP itself does not directly “see” or “touch” the physical inventory. It is more like a senior commander, relying on battle reports (inventory data) provided by frontline forces (WMS/POS) to grasp the overall situation and use this information for higher-level resource planning, financial accounting, demand forecasting, and supply planning.
Inventory of WMS systems:If ERP is the brain of the enterprise, then WMS is the arm that finely controls the warehouse. The core mission of WMS is to realize the refined, efficient and accurate management of internal operations in the warehouse. The inventory it focuses on is no longer the overall summary figures, but specific to a certain warehouse, a certain type of goods, which warehouse area, which lane, which specific cargo space, and how many quantities. WMS plays a dual role in inventory management: it is responsible for recording accurate warehouse book inventory and managing and operating specific physical inventory.
Inventory of POS systems:When you walk into any new retail store, the POS system is the inventory manager there. It records the purchase, sale and inventory of goods in stores, not only managing book inventory (automatically calculated through business activities such as sales, returns, and allocation), but also regularly counting physical inventory. Unlike central warehouses, the particularity of stores is that inventory changes frequently and diversely, from normal sales to wear and tear, from sample display to real-time replenishment, all of which need to be accurately recorded by the POS system.
Similar to WMS, POS systems with inventory management modules also play a role in managing store-level book inventory and supporting physical reconciliation in stores.
The inventory management of these three systems has its own focus, but it is closely related. For example, when we implemented an inventory counting solution in a new retail enterprise, we had to consider the data flow logic of all three systems at the same time to ensure the consistency of the final data.
3. The relationship between ERP system inventory and WMS system inventory
The inventory relationship between ERP and WMS can be compared to “commander and executive”. ERP, as the commander, grasps the overall strategy and issues instructions for inventory changes; The WMS acts as an executive officer and is responsible for the implementation and feeds back the results to the ERP. This relationship is reflected in several key business scenarios:
- Procurement inbound process: When a purchase order is created, ERP pushes the order to WMS. After the supplier delivers to the warehouse and the WMS checks the warehouse, the inventory quantity increases in real time, and the warehousing result is transmitted back to ERP. The ERP updates its inventory data accordingly to complete the book increase. This process may seem simple, but if the WMS inbound confirmation is not returned in time, or if the data returned differs from ERP expectations (such as partial inbound), it will lead to inconsistent inventory between the two systems.
- Sales outbound process: Sales orders created in ERP are also pushed to the WMS for picking, packing, and shipping. After the WMS completes the outbound operation, the inventory quantity is reduced and the outbound results are returned to ERP. ERP updates inventory based on post-apost information to complete book reduction. The challenge with this link is that sometimes the actual outbound quantity of the WMS may be different from what the ERP expects due to insufficient inventory or other reasons, and improper handling can cause a difference.
- Inventory adjustment scenario: When WMS performs an inventory and finds that the physical inventory does not match the book inventory, the inventory adjustment is made. These adjustments need to be synchronized to the ERP, ensuring consistent data between the two systems. Some companies require ERP approval before WMS can execute major inventory adjustments, which adds complexity to the process but improves data accuracy.
The inventory relationship between ERP and WMS is a relationship between the issuance of instructions and the feedback of execution. ERP issues inventory change instructions, WMS performs actual operations and feedback results, and ERP updates its own inventory accordingly. There may be differences between the two due to various reasons, such as interface transmission delays or failures, inconsistencies in special business processing logic (such as samples, gifts, etc.), differences in inventory calculation methods between systems, human errors, etc. To deal with these problems, it is necessary to establish a strict master data management mechanism, a regular automatic verification mechanism, and a standardized discrepancy handling process.
4. The relationship between ERP system inventory and POS system inventory
The inventory relationship between ERP and POS is actually very similar to the relationship between ERP and WMS, which can be understood as the relationship between “strategy and tactics”. ERP plans inventory strategy from the perspective of the overall enterprise, including inventory planning and distribution strategy of each store; POS, on the other hand, is at the level of tactical execution, handling specific business activities such as daily sales, returns, and store inventory.
Headquarters distribution to store process: This is the most frequent scenario where ERP and POS inventory interact with each other. ERP generates distribution orders according to sales forecasts and inventory strategies, performs outbound through WMS, and after logistics distribution to stores, the POS system performs warehousing operations, increases store inventory, and transmits the results back to ERP. In this process, the circulation of inventory between systems needs to be precisely coordinated.
- Store sales process: When a customer purchases an item in a store, the POS system records the sale and automatically reduces the store inventory. This sales data is sent back to ERP on a regular basis, usually at the end of the day, which updates the overall inventory status of the enterprise. Sales are the most common inventory change factor in stores and one of the core functions of POS systems.
- Other inventory changes in stores: In addition to sales, stores have many other business activities that may cause inventory changes, such as product loss, sample display, and inter-store transfer. These activities are recorded and processed in the POS system and then synchronized to the ERP. Compared with central warehouses, store inventory changes tend to be more frequent and diversified, which puts forward higher requirements for data synchronization between systems.
- Store inventory process: Stores usually need regular inventory to calibrate book inventory and physical inventory. The POS system records the inventory results, calculates the profit and loss of the market, and synchronizes the adjustment results to the ERP. Due to the complex store environment (large flow of people, diverse SKUs, etc.), inventory differences are often greater than those of central warehouses, and how to effectively manage these differences is a common challenge faced by new retail enterprises.
From my experience, the inconsistency between ERP and POS inventory data is usually due to these reasons: delayed sales data return, unsynchronized store special business processing (such as temporary promotions, gifts, etc.), irregular operation of store staff, and inconsistent inventory calculation logic between systems. To solve these problems, it is necessary to start from both technical and management aspects, not only to optimize the system integration scheme, but also to standardize the business operation process.
5. ERP book inventory supports “omni-channel one pallet”
Omni-channel one pallet is an important concept in the new retail era, which refers to the unified management of the inventory of all online and offline sales channels to realize the sharing and optimal allocation of inventory resources. In the traditional retail model, different sales channels often have their own independent inventory systems, resulting in inventory fragmentation, inefficiency, and increased costs. Omnichannel one-on-one inventory breaks down this barrier, allowing businesses to manage inventory in a more flexible and efficient way to meet the diverse shopping needs of consumers.
So, how does ERP’s book inventory support this grand “omni-channel one pallet” strategy?
We can understand it from the following aspects:
ERP is the data cornerstone of “one pallet”:As we discussed earlier, ERP systems, as the central nervous system of enterprises, collect inventory movement data from various business systems (such as WMS, POS). Whether it’s inventory in a central warehouse (managed by WMS and synchronized to ERP), inventory in hundreds or thousands of stores (managed by POS and synchronized to ERP), or even virtual inventory on an e-commerce platform, a unified, global inventory view will eventually be formed in the ERP system.
This unified book inventory is the data basis for realizing “one pallet”. Without this centralized, relatively accurate inventory data pool, omnichannel inventory sharing and allocation would be impossible.
Transparency and visualization of global inventory:With ERP book inventory, enterprises can “see” inventory distribution across all channels in real time or near real-time. Which goods are in which warehouse, how many are in which store, how many are in transit, which are pre-ordered, and which are sellable. This transparency allows enterprises to have a clear grasp of the overall inventory health and avoid the “blind man’s touch” caused by the inventory information islands of various channels in the past.
Intelligent allocation and fulfillment of orders to support (core reliance of OMS):In the new retail scenario, the order management system (OMS) plays the role of the order processing center. When an online order is generated, the OMS needs to decide which inventory point (warehouse or store) to fulfill the contract based on preset rules (such as optimal cost, optimal timeliness, nearby delivery, etc.). This decision-making process relies heavily on the accurate, global available inventory data (ATP – Available to Promise) provided by ERP.
If the ERP’s book inventory is inaccurate or does not fully reflect inventory across all channels, the OMS’s allocation strategy may go wrong, leading to overselling, delayed shipments, or unnecessary logistics costs.
Facilitate flexible allocation and sharing of inventory across channels:When a certain channel (such as store A) is out of stock and other channels (such as store B or central warehouse) still have inventory, based on the unified book inventory information of ERP, enterprises can quickly make decisions and execute inventory allocation, transfer surplus inventory to out-of-stock locations, maximize sales demand, and reduce sales losses caused by partial shortages.
For example, customers can choose to buy online, pick up in store (BOPIS – Buy Online, Pick up In Store), or the system will automatically assign the order to a store where it is in stock for “Ship from Store”.
Enhancing Customer Experience and Satisfaction:Accurate “one pallet” means that the inventory status displayed to customers by front-end sales platforms (e-commerce websites, apps, mini programs, store POS) is more reliable. Customers can clearly know if the product is in stock, when they can expect to arrive, and can choose more fulfillment methods.
This significantly reduces negative experiences such as order cancellations due to inaccurate inventory information and apologies and reassurances after overselling, thereby improving overall customer satisfaction and loyalty.
Optimizing Overall Inventory Costs and Efficiency:With a unified view of omnichannel inventory and flexible allocation, companies can more effectively reduce the total amount of safety stock, reduce inventory carrying costs and backlog risks. At the same time, through intelligent replenishment and allocation strategies, inventory turnover can be improved and the operational efficiency of the entire supply chain can be improved.
In order to more intuitively understand the core role of ERP book inventory in “omni-channel one inventory”, we can look at the following diagram:
- Data aggregation: WMS systems (manage warehouse inventory), POS systems (manage store inventory), and possibly other inventory holders synchronize their inventory movements and snapshot data to the ERP system.
- The central hub role of ERP: The ERP system integrates these data to form a unified book inventory of the enterprise. This book inventory is the basis for calculating the committable amount (ATP) and providing visibility into the inventory.
- Data applications and services: Order Management System (OMS): Obtain global available inventory (ATP) from ERP, perform intelligent order allocation (e.g., decide whether to ship from a central warehouse, ship from the nearest store, or arrange store pickup), and issue fulfillment orders to the WMS or POS.
- Online sales channels: Show customers the availability of products by querying inventory information in ERP (or through OMS).
- Offline store POS: In addition to managing inventory in the store, you can also query the ERP (or through OMS) to understand the inventory of other stores or warehouses to support cross-store relocation or provide customers with a wider range of fulfillment options.
- Replenishment and allocation planning system: Based on the global inventory data and sales forecast provided by ERP, formulate intelligent replenishment and allocation plans to optimize inventory structure and improve turnover rate.
- Closed-loop feedback: When a WMS or POS performs a fulfillment operation (such as outbound), its inventory changes, and these changes are synchronized back to the ERP again, forming a dynamically updated closed loop to ensure continuous account-to-book matching and inventory data accuracy.
Of course, in order for ERP book inventory to truly and effectively support “omni-channel one pallet”, the premise is that the ERP system must be able to obtain inventory change data from WMS, POS and other execution systems in a timely and accurate manner. This requires strong system integration capabilities, standardized business processes, and continuous data governance.
It can be said that the book inventory in ERP is the engine and navigation system for new retail enterprises to realize the dream of “omni-channel one pallet”. It’s not just a number, it’s a key hub that connects various sales channels, drives efficient operations, and enhances customer experience.
6. Summary: Clarify the inventory context and control new retail
After the dismantling of the previous parts, I believe that everyone should have a clearer understanding of the system book inventory, physical inventory, and their roles and relationships in the three core systems of ERP, WMS, and POS in the new retail scenario.
Let’s briefly review the core points:
System book inventory vs. physical inventory:
The former is the “theoretical value” calculated by the system based on the document, such as the bank account balance; The latter is the “actual number” that exists physically, like cash in a wallet. The difference between the two (difference between accounts and facts) is the norm, and the core of management is to continuously discover, analyze and correct discrepancies, and pursue “consistent accounts”.
Inventory positioning of the core system:
- ERP system: plays the role of “brain” and “commander-in-chief”, manages the overall and summarized book inventory, is the basis for enterprise financial accounting and strategic decision-making, and is the data cornerstone of “omni-channel one inventory”.
- WMS system: As the “executive” and “fine butler” of the warehouse, it not only manages the book inventory from the warehouse to the warehouse location, but also directly corresponds to and operates the physical inventory to ensure the efficiency and accuracy of warehouse operations.
- POS system: As the “front-line command post” of the store, it manages the store-level book inventory (driven by sales, returns, allocation, etc.), and supports the physical inventory and verification of the store. Collaboration and data flow between systems: These three systems do not exist in isolation, but are closely linked through interfaces and data synchronization.
WMS and POS are the source and executor of inventory changes, and the inventory data they generate (inbound, outbound, inventory adjustment, etc.) needs to be transmitted to ERP in a timely and accurate manner to update the global book inventory of ERP. The smoothness and accuracy of this data flow are the key to the effective operation of the entire inventory management system.
The cornerstone of “omni-channel one pallet”:
The unified and accurate book inventory in ERP is the core support for realizing online and offline inventory sharing, intelligent order allocation, flexible cross-channel allocation, and finally achieving the strategic goal of “omni-channel one pallet”. As shown in the figure above, ERP provides a unified inventory view and decision-making basis for OMS, online and offline channels, and planning systems by aggregating inventory data from all parties.
In the field of new retail, where multiple systems are intertwined and business scenarios are complex, a deep understanding of these basic inventory concepts and their embodiment and circulation logic in different systems is crucial for supply chain product managers, project implementation consultants, or business operation personnel. It can help us better design system solutions, optimize business processes, solve practical problems, and ultimately help enterprises improve operational efficiency, reduce costs, and improve customer experience through efficient inventory management in the fierce market competition.
