Inventory management may not sound sexy, but the ability to track goods or materials is essential to the health of any business. Accurate information about inventory helps managers reduce waste, meet customers' expectations, and anticipate future demand. It's a critical part of maximising profit for your company.
Perpetual or Periodic Inventory?
Traditionally, if you wanted to know how many items a distributor had on hand, or what materials a manufacturer had in the warehouse, you would need to perform a physical count and reconcile it with paper systems or batch-based, on-premise systems used by different teams. Businesses would physically count stock at the end of a set period, and the inventory figures would be updated at that point. This is known as the periodic inventory system, as the information is updated periodically.
Perpetual inventory management, in contrast, uses inventory management software and processes that allow for real-time updating of the inventory count. Often, this means employees use bar code scanners to record sales, purchases, or returns at the moment they happen. This information is fed into a continually adjusted database that tracks each change. The automatic, or perpetual, updating of the inventory is what gives the system its name and differentiates it from the periodic approach.
In recent years, advances in inventory management software and the ability to integrate it with other business systems have made perpetual inventory a more practical and powerful option for many businesses. Additionally, cloud-based inventory management systems are often real time, a key element of a perpetual inventory system.
What Can Perpetual Inventory Management Software Do for You?
The perpetual inventory system has the advantage over periodic approaches in three main areas: reducing waste, increasing data accuracy, and improving warehouse management.
Waste Not, Want Not
As a business, carrying more inventory than you need is costly and can lead to wastage. On the other hand, carrying too little means you risk disappointing your customers and losing sales revenue to your competitors. As the perpetual inventory software is always up to date, you have instant visibility into stock levels, allowing you to respond to changes in demand more quickly.
Accuracy
Inventory management software relies heavily on automation, particularly the use of bar code scanners, for real-time updates. Automation removes some of the potential for human error, typos, and overlap so the business has a more accurate picture of inventory at any moment.
Warehouse Management
Knowing which items are frequently restocked, or the kinds of items that are most often needed together, is vital information for organising and maintaining an effective warehouse. Introducing inventory management software that connects the warehouse to point of sale, for instance, means the warehouse manager can plan for the most efficient use of space and resources to support the business and respond to automated system alerts when stocks run low.
Even Better Together
While all of these benefits are extremely useful, the real value of perpetual inventory software comes from the ability to integrate it with other business systems.
For instance, real-time inventory information is vital for the financial and accounting teams. Inventory can make up a large part of your stated assets, so integrating inventory management with financial systems helps ensure accurate tax and regulatory reporting.
It also improves things for your customers. With access to real–time data, salespeople can provide accurate shipping information, manage expectations, and provide a better customer experience that directly impacts your reputation. At the same time, integrating the inventory software with marketing systems provides that team with a current snapshot of what's selling and what's not. Marketers can set current information in the context of historical trends to understand customer behavior and position the company to meet anticipated customer demand.
Conclusion
Inventory management software that supports a perpetual inventory system is designed to give you more insight into your business from the ground up. It can help you run a leaner warehouse, and provide essential input into accounting, sales, and marketing functions. Ultimately, it can give you the key to deliver a better experience to your customers—and who doesn't want that?
To understand the advantages and disadvantages of the Perpetual Inventory System, think of an Ice-cream chain with 25 outlets across the city. Also, all the ice-creams sold in each of these outlets are prepared at a central facility located on the outskirts. Recently the chain has seen stock-outs because of a sudden rush of customers at some of the
outlets. So, they are considering moving towards a perpetual system of inventory management.
A perpetual inventory system is one that updates the levels of inventory on a continuous basis. This system relies to a great extent on automation to instantly track purchases and sales and update the inventory records immediately. Hence, this system allows businesses to keep a real-time count of the inventory on hand.
Table of Contents
- Advantages of Perpetual Inventory System
- Real-Time Updates
- Managing Multiple Locations Easily
- More Informed Forecasting
- Facilitates Preparation of Financial Statements
- Disadvantages of Perpetual Inventory System
- Expensive Technique
- Breakages and Spoilage Not Accounted For
Real-Time Updates
A perpetual inventory system records changes in stock levels in real-time as soon as the firm purchases inventory. And as soon as the firm sells some part of the inventory. So, this continuous stock tracking allows a firm to find out the inventory items that are running low at the right time.
So, if the Ice-cream chain finds that a particular flavor of ice cream is running low at some of the outlets, it can respond at the right time by preparing more quantity of that ice cream. And sending it to the outlets where it was running low before the inventory of that ice cream becomes zero, and the business loses its customers.
Managing Multiple Locations Easily
A perpetual inventory system allows a big company that operates at multiple locations to operate with ease. In the absence of a perpetual inventory system, it becomes difficult to track the inventory levels of all the stores/outlets at distinct locations. But, with a real-time inventory count of all the locations on your screen, it becomes very easy for the central facility to find out the total requirement of the chain and place an order for it.
More Informed Forecasting
A perpetual inventory system allows you to understand the buying patterns of customers. E.g., because the inventory system is constantly updated, the ice-cream chain may find out that a particular time of the day causes demand spikes or that a condition in weather is related to more demand for a particular flavor of ice cream. Hence, based on this knowledge, the business can then design its supply chain around the buying habits of its customers.
Facilitates Preparation of Financial Statements
The value of the inventory is a component of the financial statements. A perpetual inventory system avoids the delay in the preparation of financial statements as the count of the stock is readily available. So, this system avoids the long and costly process of physically counting the inventory levels.
Disadvantages of Perpetual Inventory System
Expensive Technique
Perpetual inventory systems are expensive. The technology necessary for the system [barcodes, scanner, computer software, etc.] to work can be a huge expense. Updating the existing system to accommodate the new one can also add to the expenses. Training the employees or adding new ones to work on the system is another expense. Hence, for a small firm with low margins, this system is not recommended.
Breakages and Spoilage Not Accounted For
The perpetual inventory system uses purchases and sales to update inventory levels. If some items break down or get spoiled after purchasing and storing them, they won’t come to the notice of the management unless a physical count is done. But, a physical count is not a part of the perpetual inventory system. So, until the ‘voluntary’ physical count happens, the management will count the broken parts as inventory. The same is the case with thefts. Hence, there is a possibility of error under this system.
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Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".