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Perpetual Vs. Periodic Inventory: Differences Between the Two Inventory Systems

You are currently viewing Perpetual Vs. Periodic Inventory: Differences Between the Two Inventory Systems

The survival and success of a business heavily depends upon carefully conducted practices of inventory management. The right choice of an inventory management system (IMS) is integral for preventing stock-outs, avoiding unnecessary inventory carrying costs, and ensuring overall profitability. While stock-outs result in loss of potential business, high inventory carrying costs and dead stock are deteriorating to business health. Therefore, choosing an IMS that is the right fit for your company is extremely important.

Inventory management systems are broadly classified into perpetual inventory systems and periodic inventory systems. In this article, we will discuss the differences between the two and when to use perpetual inventory system.

What is Perpetual Inventory?

As the name indicates, perpetual inventory systems are always “perpetually” running, recording, and updating inventory information. Perpetual Inventory is a process of recording changes in inventory records right when they occur (i.e. during sales, orders processing, etc.). Perpetual inventory either makes use of enterprise asset management software technology, point-of-sale computerized technology, or a combination of both to automatically collect and display data regarding stock levels.

What is Periodic Inventory?

The term ‘periodic’ is essentially antonymous to ‘perpetual’. Just as the term signifies, a periodic inventory system records and updates inventory data only periodically. This makes it prone to errors and comparatively inefficient. Periodic inventory records are made through the physical counting of stock.

When to Use Perpetual Inventory for Your Business?

Perpetual inventory system aims to streamline the inventory records-keeping and optimize and update inventory-relevant operations. Even if you own a small business, you can use perpetual inventory. However, it’s the best choice for businesses with high sales volumes.

What Are the Advantages of Perpetual Inventory? 

Perpetual inventory systems have considerable advantages such as a cost-effective take on inventory management, enhanced forecasting of customer demand, real-time and accurate inventory counts and improved cash flows. Moreover, it is far less prone to human error, and it urges a business to efficiently maintain updated records at all times.

Cost-effective Inventory Management

A perpetual inventory system comes with a detailed, inventory-related data set that enables an accurate forecasting of demand. This way businesses can avoid spending extra on unneeded stock and scale the amount of stock based on demand, helping to significant lower inventory management costs.

Improved Demand Forecasting

Forecasting customer demand accurately is essential for managing inventory effectively, because inaccurate forecasts can lead to financial loss and business loss. A perpetual inventory system enables full product accountability and monitors all transactions, ensuring precise demand forecasting and relevant processes.

No Business Disruptions

Instead of cumbersome physical counting, you can conveniently update stock levels using your technology-driven perpetual inventory management system. This means no more disruptions in business opportunities due to slow physical inventory updating procedures. This allows cost-effective supply chain management, better warehouse organization, and improved overall business.

Accurate and Real-time Inventory Counts

In a perpetual inventory system, all key tasks are automated and records are promptly updated, which is why it offers accurate inventory counts. This enables a business to avoid having to cope with product shortages and potential stockouts.

What Are the Disadvantages of Perpetual Inventory? 

While perpetual inventory systems are mostly preferred over their alternative (periodic inventory) due to their multiple advantages, the former do have a few limitations as well. While not as numerous as their alternative, these still may count as significant reasons for not being the ideal choice for a particular business. Read on to see what the cons of perpetual inventory are.

Expensive Implementation

Perpetual inventory systems require dedicated software, equipment, and employee training, which add to the initial costs that don’t suit some businesses.

Need for Physical Stock Counts

A perpetual inventory management system alone isn’t enough for precision in stock readings, therefore, coupling it with physical counting is required.

Requirement for Consistent Data Monitoring

Perpetual inventory runs on data, and excessive data calls for constant and active monitoring. You cannot afford calculation or updating errors; therefore, you must implement a robust data monitoring protocol.

How Do You Track Perpetual Inventory?

While we have discussed the prompt and constant approach of updating stock levels in a perpetual inventory system, we now need to look at how it works. 5 metrics are of utmost importance in these systems:

1. RFIDs or Barcode Updates of Inventory Levels

Radio Frequency Identification codes (RFIDs) or barcode scanners notify the inventory management system of a debit update whenever an item is sold. This update is recorded in the system right away.

2. Cost of Goods Sold (COGS)

Whenever a product is added or removed from your warehouse inventory, this change is updated in the records too.

3. Automated Updating of Reorder Points

Reorder points are automated for updates by utilizing past inventory and sales data. This ensures that inventory is always maintained at the required levels.

4. Automated Generation of Transaction Orders

Whenever an item or product SKU reaches the specified reorder point, a transaction order is automatically generated and sent to your supplier.

5. Updating Received Goods

When stock is received at your warehouse, it is automatically updated and displayed on your warehouse management software (WMS) dashboard. This enables streamlined supply chain operations.

Key Takeaway

Inventory management is crucial to business success and is made possible only through owning and utilizing the right tools. Paired with a perpetual inventory system, these tools are capable of efficient inventory management.

By partnering with a 3PL fulfillment center like ShipBots, you get an efficient perpetual inventory management system that helps streamline order fulfillment without sacrificing order accuracy. Our inventory management software generates automated reports to help you track each and every step of your order fulfillment process. Get in touch with us today to learn more about how we can help you manage your inventory via a perpetual inventory system.