Warehousing & Fulfillment

What is a Perpetual Inventory System?

Jules

by Jules

On 2019 M05 22

by Jules

A successful eCommerce business runs on an efficient inventory system. Managing stock is not only critical for your company’s supply chain, but is also very important for the overall management of your business. For many businesses, a perpetual inventory system can be an answer to your inventory management issues.

Gone are the days when entrepreneurs have enough time on their hands to search and update their inventory for small queries like out-of-stock items. In today’s world, online merchants need instant and automated results and information. Perpetual inventory systems can do all of that, plus manage inventories very efficiently and accurately.

But just what exactly are perpetual inventory systems? Here’s a closer look at what they are, their advantages and disadvantages, the differences between periodic and perpetual inventory systems and some examples!

What is a Perpetual Inventory System?

A perpetual inventory system is an inventory accounting and management method that records the sale of an item in an inventory immediately using a computerized point-of-sale system. In a perpetual inventory system, real-time updates are made to the inventory when items are sold received, relocated, picked or discarded.

Under a perpetual inventory system, inventory management becomes much more seamless. As soon as a transaction is made at the point-of-sale, it’s recorded automatically through a bar code and is then recorded as an item deducted from stock. The status of the inventory pertaining to that item is then instantly updated.

In short, perpetual inventory systems update inventories in real-time using an automated system.

Advantages and Disadvantages of Perpetual Inventory Systems

Perpetual inventory systems, while very popular among eCommerce merchants nowadays, have their own unique advantages and disadvantages to consider closely. Here’s a quick look at some of them!

What are the Advantages of a Perpetual Inventory System?

Perpetual inventory systems offer a number of major advantages, a few of which include:

  • Automated updates that offer instant access to the data. This way, decision making on the entrepreneur's end becomes easier.
  • In a perpetual inventory system, record keeping is more accurate and efficient.
  • Real-time sales records enable online merchants to evaluate which items are the most popular in a fast and transparent way, making it easier to plan for the future efficiently.
  • In a perpetual inventory system, a centralized stock management system is implemented much more efficiently. This helps entrepreneurs manage their inventory even if it’s distributed in multiple locations.
  • It’s easy to see out-of-stock items as they’re updated real-time, something especially important if your business offers same-day delivery.
  • If your company has more than one stakeholder, a perpetual inventory system lets them have direct control over the inventory if they need it.
  • Paperwork in the form of reports and annual tax filing becomes much easier and efficient.
  • Demand forecasting and product performance reports are much simpler to conduct.
  • When using a perpetual inventory system, your company’s staff expenses are considerably less. Fewer staff members are required to manage the inventory, while incidences of human error are also greatly reduced.
  • Under a perpetual inventory system, stock level discrepancies are easier to investigate.

What are the Disadvantages of a Perpetual Inventory System?

Despite their many advantages, perpetual inventory systems certainly aren’t flawless. A few major drawbacks include:

  • A large financial investment is required to purchase the computer equipment and software needed to implement a perpetual inventory system. Additional employee training, which costs both time and money, is also needed to run the system effectively.
  • Although the system is automated and updated in real-time, the chance for human error still remains. Employees can still enter the wrong data by mistake!
  • The system must be monitored closely and security monitoring equipment needs to be installed when using this type of inventory management system.

What is the Major Difference Between a Periodic and Perpetual Inventory System?

A periodic inventory system is an inventory system where bulk updates are made periodically, typically on a monthly or quarterly basis. This form of inventory management requires less investment in expensive inventory management software but offers limited inventory information on a timely basis due to its periodic nature.

In a perpetual inventory system, on the other hand, all the data is continuously available for stock management and decision making. Both systems offer their own unique advantages and disadvantages to consider closely before deciding which is best for your business.

Is a Perpetual or Periodic Inventory System Better?

If you’re an SMB with one location, a periodic inventory system may work better due to your limited size. However, enterprise-level businesses with multiple branches that make international deliveries will likely find that perpetual inventory systems are needed for automated and rapid stock management.

Business size isn’t the only criteria, however. If a small business or startup growing quickly finds that a periodic inventory system is too inefficient, switching to a perpetual inventory system is likely a good idea.

Ultimately, which system to use in the periodic vs. perpetual inventory system debate comes down to your individual business needs. Growing companies that need accurate inventory data quickly and an automated system to focus their time and finances elsewhere will likely find that a perpetual inventory system is the better choice. However, companies that don’t move a lot of stock quickly and have the additional manpower to conduct less frequent inventory audits will probably find that a periodic inventory system is the way to go.

Perpetual Inventory System Examples

Most businesses use perpetual inventory systems nowadays due to their accuracy and inventory management automation. A few notable examples include:

Though each one has their own distinct advantages and disadvantages, most of these systems, notably, are mobile-friendly. This makes it very easy for entrepreneurs and eCommerce stock managers to manage their inventory efficiently even when out of the office, making it simple to make business decisions, track inventory changes and gain insights into sales data from just about anywhere.

Perpetual Inventory Systems: Are They Right for Your Business?

Both the advantages and disadvantages of a perpetual inventory system should be weighed heavily before deciding if it's right for your business. Perpetual inventory systems, while not foolproof, offer accurate inventory data in real-time while making the stock management process automated and much more efficient.

For companies willing to invest in perpetual inventory system software upfront, the efficiency, accuracy, automation and real-time data that the system offers could very well be worth it!