Welcome to Chapter 4 of Sellercloud’s inventory management guide. This chapter will explain everything you must know about inventory control systems, also known as ‘stock control systems.’
Specifically, this chapter will focus on perpetual and periodic inventory systems and their differences.
Does it feel like too much too soon? Head back to the guide homepage and check out the previous chapters.
What Are the Two Methods of Inventory Control?
An inventory control system is a set of processes, tools, and techniques businesses use to manage and track their inventory.
It involves monitoring stock levels, placing orders, tracking movements, and optimizing inventory to ensure efficient supply chain management and meet customer demand.
The two methods of inventory control are:
- Perpetual inventory system.
- Periodic inventory system.
What Is the Difference between Periodic and Perpetual Inventory Systems?
Generally speaking, periodic systems are more straightforward and more suitable for smaller businesses with lower inventory volumes.
In contrast, perpetual systems offer greater accuracy and efficiency, ideal for companies with more extensive inventories.
In a periodic system, you manually track your inventory at specific intervals, such as monthly or quarterly.
You don’t have real-time visibility into your inventory levels. Instead, you rely on physical counts to determine the quantity on hand.
This means that you only have an accurate view of your inventory at the time of counting.
In contrast, a perpetual system offers real-time inventory tracking.
With this system, you use technology like barcode scanners and inventory management software to record your inventory continuously.
The system is updated automatically every time a product is bought or sold. This lets you have up-to-date information on stock levels, making it easier to manage reorder points and prevent stockouts.
Both systems have their advantages and disadvantages, which we will get into.
What Is a Perpetual Inventory System?
According to Merriam-Webster’s definition of ‘perpetual,’ the closest word to perpetual is ‘everlasting.’
Other synonyms include ‘ceaseless,’ ‘uninterrupted,’ and ‘nonstop.’ In short, it’s something that occurs continuously.
With that in mind, a perpetual inventory system keeps running—there are no breaks or intervals—it must be constantly updated so you have constant visibility on stock levels.
There is no second guessing based on yesterday’s manual stock take with a perpetual inventory system; you always know your stock levels.
Every time a product is bought or sold, a perpetual inventory system is updated automatically, providing accurate and up-to-date information on inventory quantities.
Using a perpetual inventory system, businesses have a clear view of their stock at any given moment, enabling more efficient inventory control and decision-making.
Let’s look at some common questions about perpetual inventory systems.
Why Use a Perpetual Inventory System?
The most important reason your business may want to implement a perpetual inventory system is that it will provide real-time visibility on inventory levels, which is invaluable.
It’s all about enhancing operational efficiency through technology, so there are always sufficient inventory levels—ever too much and never not enough (or none).
Furthermore, perpetual inventory systems prevent problems from manually counting stock and allow merchants to automate things like reorder points.
What Type of Business Would Use a Perpetual Inventory System?
Merchants with significant sales volumes, fast-moving products, or multiple sales channels often use some kind of perpetual inventory system.
Aside from retailers, this can also include wholesalers and manufacturing companies that need real-time inventory tracking and control.
Perishable goods, such as food or pharmaceuticals, can greatly benefit from the real-time monitoring and strict inventory control enabled by perpetual systems too.
What Are the Advantages of Perpetual Inventory Systems?
Some of the advantages above may sound pretty clear-cut, but as always, how beneficial a perpetual inventory system is to your business can depend on your business needs.
- Perpetual systems provide up-to-date and accurate information on inventory levels, which helps with timely decision-making and preventing stockouts or overstocking.
- Businesses can set up automated alerts for reorder points, ensuring timely replenishment, reducing holding costs, and improving customer satisfaction.
- Using barcode scanners and software, perpetual systems minimize human error, improving the accuracy of inventory records.
Why Are Storage Costs Reduced under a Perpetual Inventory System?
Perpetual inventory systems help reduce storage costs in more than one way.
Firstly, perpetual inventory systems offer real-time visibility into stock levels, ensuring that businesses have accurate and up-to-date inventory records.
By having precise information at their fingertips, businesses can make informed decisions about inventory management, preventing overstocking and reducing the need for excess storage space.
Secondly, with real-time data available, perpetual systems enable businesses to set optimal reorder points and maintain inventory levels that align with customer demand.
By avoiding excessive stockpiling, businesses can reduce the amount of inventory that needs to be stored, resulting in lower storage costs.
Lastly, perpetual systems streamline the order management process by automatically generating alerts when stock levels reach predetermined thresholds.
This proactive approach ensures timely inventory replenishment, reducing the time inventory spends in storage.
By minimizing inventory holding time, businesses can optimize storage space and decrease associated costs.
What Does the Success of a Perpetual Inventory System Depend Upon?
Perpetual inventory systems depend on a consistent flow of data to keep track of inventory levels—you cannot implement a successful perpetual inventory system without this data.
This data needs to keep track of incoming and outgoing inventory and any other adjustments.
To record this data, your business needs to use technology, like barcode scanners, and software, like a WMS (Warehouse Management System).
On a more basic level, a perpetual inventory system can only work if your company is efficient in handling deliveries and fulfilling orders.
It is also recommended that businesses do a physical count of their inventory every so often to ensure that it matches their digital records.
What Is a Periodic Inventory System?
So, now that we know what a perpetual inventory system is let’s take a deeper look at its alternative—periodic inventory systems.
The word ‘periodic’ already gives you an idea of what a periodic inventory system is.
Quite simply, with a periodic inventory system, merchants do a manual stock take at a specific interval.
Let’s dive deeper into how periodic inventory systems work.
Why Use a Periodic Inventory System?
Though perpetual inventory systems offer real-time inventory visibility, there are some instances where a periodic inventory system could be better for your business.
Specifically, if your business has limited resources, a small inventory, or cannot yet invest in a perpetual inventory system.
Furthermore, businesses with slow-moving inventory or relatively simple operations may find a perpetual inventory system a little excessive and periodic inventory systems more practical.
That said, in the long run, businesses using periodic inventory systems will find that they will need to upgrade to a more sophisticated perpetual inventory system as they grow.
What Type of Business Would Use a Periodic Inventory System?
Typically, the types of businesses that use a periodic inventory system instead of a perpetual inventory system are those with slower inventory turnover rates.
They could also be specialty stores with unique or seasonal items or businesses with low-cost or non-critical products that do not require constant monitoring.
Elsewhere, small businesses with limited operations may use a periodic inventory system but aspire to implement a perpetual inventory system when they have enough inventory or cash flow.
In the end, how suitable your business is to a perpetual or periodic inventory system comes down to inventory volume, operation complexity, and the level of control you need.
What Are the Advantages of Periodic Inventory Systems?
Like a perpetual inventory system, periodic inventory systems have pros and cons. What might be right for one business may be a poor choice for another.
- Periodic systems are simple to set up and require fewer technological resources than perpetual systems. This makes them more accessible and cost-effective.
- Offers flexible inventory tracking as you can choose intervals for physical counts, such as monthly or quarterly, allowing for easier integration with existing processes.
- Periodic systems don’t rely on technology like barcode scanners or real-time tracking systems. Advantageous in situations where technology is limited or unreliable.
How Do You Record a Periodic Inventory System?
Periodic systems rely on physical counts to provide businesses with an estimate of their inventory position, allowing for basic inventory management and financial analysis.
To record inventory, businesses conduct a physical count of all products on hand at predetermined intervals—for example, daily, weekly, monthly, or whatever works best.
The count includes opening inventory, purchases made during the counting period, and any adjustments or returns.
Once the physical count is complete, businesses calculate the cost of goods sold (COGS) by subtracting the closing inventory from the sum of opening inventory and purchases.
What Does the Success of a Periodic Inventory System Depend Upon?
The success of a periodic inventory system primarily depends on accurate physical counts.
For this to work, merchants must also employ reliable inventory tracking processes between counting intervals to monitor stock movements accurately.
It’s worth noting that intervals may differ for different businesses based on how much stock they sell and how quickly inventory is sold.
Timely inventory replenishment also plays a vital role in ensuring the success of a periodic inventory control system, as does accurate forecasting and planning.
Can I Use Both Periodic and Perpetual Inventory Systems at the Same Time?
Yes, you could use periodic and perpetual inventory systems simultaneously, but there are various reasons why you’d prefer not to.
Firstly, getting the two systems to work together can be a technical nightmare. Most notably, information can get lost or delayed leading to inaccurate data.
Furthermore, if there is a disparity between the two, how will you know which is accurate? Ultimately, using both perpetual and periodic inventory systems may mean more work.
It is far more practical to stick to one system. If you have a perpetual inventory control system, you have likely outgrown the need for a periodic inventory system.
On top of that, it’s better to have a centralized system as it will provide you with a single source of truth on your inventory levels.
Lastly, it’s worth noting that while periodic inventory systems have some handy advantages, the benefits of perpetual inventory systems far outweigh them.
Key Points From Chapter 4
Remember these key points on inventory control systems and perpetual and periodic inventory systems.
- There are two types of inventory control systems—perpetual inventory systems and periodic inventory systems.
- Perpetual inventory systems are best for larger businesses with complex operations, large quantities of inventory, and fast-moving products.
- Periodic inventory systems can be best for smaller companies with slower, less complex operations and limited capital.
- Both inventory control systems have pros and cons, though ultimately, as companies grow, they will likely move to a perpetual inventory system.
- You can use both periodic and perpetual inventory systems, though it is often better to rely on a centralized perpetual inventory control system.