What is a Perpetual Inventory System? Definition & Advantages
Running a retail or eCommerce business is actually quite enjoyable despite it being challenging. That is, until it’s time to count inventory. If your business is new in the market and you don’t have a lot of products in stock, counting inventory is pretty much a breeze.
However, once your store starts to grow and your stock levels increase, the process becomes more and more tedious.
Fortunately, modern technology is here to aid you, and in this case, it comes in the form of a perpetual inventory system. Why count inventory yourself when software can do it for you? What’s more, it can do it faster and more accurately than you. So, what exactly is this inventory system everyone is talking about? Let’s find out.
What is a Perpetual Inventory System?
Simply put, a perpetual inventory system is a digitised process that tracks and records inventory in real-time using powerful software solutions to do so. In other words, the software checks every product and every sale that moves in and out of your company, recording the findings in a centralised database.
What is the Purpose of a Perpetual Inventory Method?
Well, aside from computerising the process of counting inventory, the perpetual inventory method has the purpose of improving accuracy, thus providing retail and online stores with continuous and more precise inventory counts.
The data the system collects is updated every time a change is made, whether that change is procuring additional goods, moving products within a warehouse, or selling said products to customers.
The underlying benefit is that this type of system eliminates the need for periodic inventory systems or physical inventory count if you prefer to call it that. And, with improved inventory accuracy comes improved demand forecast, which is essential for the survival of online stores in today’s highly competitive market. So, digitised versus physical system; which approach should businesses opt for, you ask?
That entirely depends on the company’s needs and its capabilities. The fact of the matter is that a perpetual inventory system requires a corresponding infrastructure.
That often includes an ERP (Enterprise Resource Planning) solution, point-of-sale terminals, RFID tags and digitised bar codes, and other equipment to support the system, as well as ensure its optimal performance.
As you might imagine, the sheer costs of implementing such an infrastructure would be astronomical for startups and small businesses, especially.
Perpetual Vs. Periodic Inventory System: Advantages and Disadvantages
People firmly believe that any form of manual labour will eventually be replaced by a technological equivalent. In that case, one would have to assume that technology is always reliable and constantly operates without a fault.
Unfortunately, that’s not the case. Have you ever used any tech that didn't break down or failed eventually? That said, people should really stop comparing this with that based on whether or not that something is powered by technology. In this particular scenario, both perpetual and periodic inventory systems are different approaches focused on the same goal.
The only difference is that they utilise different means and resources that may or may not be available to your business at any given moment. As such, they both have advantages and disadvantages, as well as reasons why one should be used over the other or not used at all. So, let’s give more detail and context to both methods, shall we?
Perpetual Inventory System
As mentioned before, this is a technology-driven approach to counting inventory in real-time. Like any other technological solution, it’s more complex and provides a myriad of benefits to the organisation through software features and other capabilities. Here are some of the main advantages of the perpetual inventory method.
- Due to tracking products and sales in real-time, this method allows instantaneous updates to any changes made to your inventory.
- Increased inventory accuracy provides more detailed demand forecasting and can help businesses boost the efficacy of their entire supply chain.
- As a software solution, perpetual inventory can integrate with other business systems. This is especially true for finances, as real-time inventory tracking can ensure accurate financial reports and complete compliance with any rules or regulations your company must adhere to.
- Since the software runs in the background, there’s no need to close the store down in order to conduct an inventory count or inventory audit, for that matter. The system will do everything for you while you resume operations as usual.
No system is perfect, which is quite unfortunate for business owners. That said, choosing which software solution to utilise can sometimes be more difficult than running the company.
Every business owner must weigh the pros and cons of the system they’re interested in or risk making a catastrophic mistake. With that in mind, here are the disadvantages of using the perpetual inventory system.
- The software cannot account for any loss of inventory, which may occur due to damages, misplacements, thefts and so on. Moreover, business owners often don’t include obsolete inventory, which can further cause a mismatch between perpetual inventory count and actual physical inventory.
- Software glitches, broken scans, human errors and other factors can cause perpetual inventory to become less efficient than it’s supposed to be. As a result, your business operations will also start to decline in efficiency.
- Every software solution is prone to hacking and other sabotage attempts. You need to further invest in proper security means to protect your system and your business.
- The result of implementation and securing the perpetual inventory system is monumental initial costs. Most startups and even some well-established businesses simply cannot afford such a venture.
- You still need a physical inventory count every now and again, preferably once a year. The software relies on physical count to formulate the system it will keep track of.
Periodic Inventory System
The good old manual inventory count. It’s all fun and games until the inventory grows, and counting it manually is anything but fun. Still, startups and small businesses utilise this method simply because it is robust and, most importantly, cheap.
If you don’t have a lot of inventory, this method can also be quite reliable. You see an item, you write it down. It’s quite simple, but there are a number of things that can go wrong during the process. That said, let’s have a look at some of the pros and cons of a periodic inventory system.
Advantages:
- Easy to implement
- Affordable
- Requires less staff to perform
- Simple
Disadvantages:
- Prone to human error
- Inventory can be counted after an accounting period, not on a daily basis.
- Unscalable
- Closing down shop for inventory count
As you can see, technology might have its faults but its capabilities are far beyond manual means. This is precisely why most retail and eCommerce businesses eventually decide to let technology take over some of their operations.
When to Use a Perpetual Inventory System?
If you can afford the initial investment, it's advisable to opt for a perpetual system straight away. The system will scale with your business and it will adapt to your needs over time. It’s also recommended to avoid the perpetual system if you don’t have a lot of inventory simply to cut down on costs.
However, suppose you’re moving products fast, like with consignment inventory, for example. In that case, it’s better to utilise the perpetual system to keep track of every sale and ensure your financial reports are accurate.
All in all, you’ll still need to rely on a periodic system to give a perpetual system something to work with, so why not utilise the best of both methods and ensure that your business is making the most of every situation?
Let Bezos Help You With Your Inventory System
It’s no secret that many store owners face a dilemma about which solution to adopt. Should you stick with the periodic system because you don’t have a lot of inventory and capital? Or perhaps you should scrape enough money to invest in a perpetual system because it’s more efficient?
But what if there was a third option? With a global fulfilment network, Bezos can be the right outsourcing partner for you. Our bespoke software can manage more than your inventory, so don’t hesitate to reach out today. Give us a call and we’ll provide you with a solution that will match your every business need.
Conclusion: Perpetual Inventory System: The Right Asset for Your Business
One may argue that a perpetual inventory system is too expensive or that it may have flaws. However, one thing is for certain: technology and data-driven approaches are keys to success in today’s highly competitive market. Of course, every asset requires an investment - some more than others - but it’s the long-term benefits that make the investment worth every penny.
FAQ:
What is the difference between a perpetual and periodic inventory system?
Simply put, a perpetual inventory system uses software to track inventory in real-time and on a daily basis, while a periodic inventory system means manually counting inventory at the end of every accounting period.
What does the perpetual inventory system involve?
It involves a combination of software solutions, such as ERP or MRP (Materials Requirement Planning) and equipment, such as RFID tags, point-of-sale and digital barcodes. Together, both hardware and software allow stores to facilitate inventory data collection in a centralised location.
Is perpetual inventory LIFO or FIFO?
It can be both, or you can use WAC (Weighted Average Cost) to evaluate your inventory. The perpetual inventory system will utilise whichever method you opt for to keep track of inventory and sales.
What is an example of a perpetual inventory record?
As mentioned before, a perpetual inventory system tracks inventory in real-time. So, for example, let’s say you sold ten products today via your online store, physical store and perhaps even through B2B sale. Each time an order is fulfilled, the perpetual inventory system records transactions and updates the stock level accordingly.
