Keeping track of one’s inventory can be a tricky business when completed manually. However, in the modern age and with the help of technology, inventory keeping has been made far more accessible, allowing real-time insight into current stock levels without having to count all physical inventory items. In this article, we aim to provide a comprehensive guide on perpetual inventory systems and their significance in the field of inventory management.
What is a Perpetual Inventory System?
A perpetual inventory system is a record-keeping accounting system that logs each and every sale and purchase automatically, continually maintaining accurate reflections of inventory numbers. This, in essence, prevents companies from having to do physical stock counts each time they need to know how much inventory is left on hand. This is, instead, performed automatically through a perpetual inventory system that electronically changes the inventory number on the software system, often performed through the use of a point-of-sales system.
The perpetual inventory system of inventory-keeping differs from the periodic inventory system in that it continuously updates records within the computerized system on purchases and sales, and thus, inventory levels. Period inventory systems, on the other hand, involve a physical count of the inventory on-hand at specific intervals to help measure inventory levels and the cost of goods sold. In layman’s terms, the perpetual inventory system is categorized by three principles: real-time tracking, continuous updates, and the use of technology.
Key Components of Perpetual Inventory Management
The three principles of the perpetual inventory system can be further broken down into various components, further defining this inventory-keeping system. This section will focus solely on highlighting these essential elements:
Barcode Scanners: In the perpetual inventory management system, each product is assigned a unique barcode that contains pertinent information. Some examples of this might include the product’s description and unit price. Barcode scanners are used to scan products once they are received, sold, or moved within the warehouse which is digitally captured.
Point-of-Sales (POS) Systems: A POS system is used when the actual sales transaction between the vendor and consumer occurs. During the sales experience, the barcode of the product is scanned at the POS or cash register, and the system automatically deducts the sold quantity from the inventory. This instant update ensures that the inventory is always up-to-date, aiding in the avoidance of stock-outs or overselling.
Inventory Management Software: The backbone of a perpetual inventory management system is the inventory management software. This software integrates with barcode scanners and POS systems to centralize and organize all inventory-related data. It tracks the stock levels, generates real-time reports, and provides valuable insights to make informed decisions about restocking pricing, and sales strategies. Along with this, having an organized and efficient inventory management system, bettered by inventory management software, ensures that all stock is accounted for and minimises the risk of losses, theft, and misplacements.
Integration: For a comprehensive and efficient inventory management system, integration with additional business systems is of paramount importance – and the perpetual inventory management system is no exception. Whether the system deals with customer relations or supply chain management, the real-time reflection of inventory that perpetual inventory systems provide is necessary for open communication channels across all systems and networks.
The through-line of reliance and integration can clearly be deduced within the above-mentioned components, emphasizing how necessary the synergy of these components is in order for a perpetual inventory management system to be considered successful. They work together to provide businesses with real-time and accurate inventory information, enabling them to make informed decisions, optimize stock levels, and improve overall efficiency in managing their inventory.
Inventory Forecasting in Perpetual Inventory
Like all inventory management systems, inventory forecasting is a crucial aspect, as it informs accurate future business inventory needs. Often completed through analyzing historical sales data, market trends, and demand patterns, companies can proactively plan their inventory levels to meet customer demand and minimize the risk of overstocking or stock-out situations. Let us delve further into the importance of inventory forecasting within a perpetual inventory management system.
Most obviously, having an accurate read of what to expect inventory-wise helps in optimizing inventory levels, ensuring that the correct amount is available at all times while avoiding any unnecessary costs linked to inaccurate inventory levels. Furthermore, inventory forecasting helps inform on resource planning and any activity associated with it: procurement, production scheduling, and coordinating the supply chain. And this would not be an Intuendi article if we did not mention the importance of customer satisfaction! Providing customers with their needs and wants is a surefire way to ensure sustained customer satisfaction.
Moving onto the methods associated with forecasting inventory needs, let us dissect how they are implemented. Already mentioned is the method of historical data and trend analysis, as well as market research. A combination of these three research methods allows for identifying seasonal fluctuations, customer preferences, trends, emerging trends, and growth rates. This works on the assumption that historical data can present reliable patterns and expectations in relation to consumer demand. These findings are often strengthened by statistical analysis research, where companies use various statistical methods to identify patterns and trends in the market. Demand planning and collaborating with different departments to gain further insight into the consumer market is an additional method of forecasting inventory. Have a read through our demand planning article to understand this demand forecasting strategy even better!
Usage and Applications of Perpetual Inventory Systems
We have made clear the many facets and components of perpetual inventory systems, but we are yet to discuss how they are put to use in the real world. They offer a number of benefits across various industries – retail, manufacturing, food, or pharmaceutical, you name it! Let us evaluate how your business can leverage a perpetual inventory system to improve overall operations.
Improved Inventory Control: With real-time visibility into inventory levels, businesses are able to maintain better control over their stock. Accurate and up-to-date information ensures that companies make informed decisions regarding inventory management, aiding in the avoidance of stock-outs or overstocks. Further improving upon this aspect, perpetual inventory systems additionally trigger reorder points when inventory availability reaches a certain level, prompting timely reorders and ensuring the restocking of popular products. Best sellers and slow-movers become more easily identifiable with the help of a perpetual inventory system’s automatic updates of stock availability, allowing businesses an easier decision-making process when it comes to adjusting purchasing and sales strategies.
Enhanced Order Fulfilment Processes: Perpetual inventory systems streamline the order fulfillment process through their ability to provide real-time stock availability. Once an order is placed, the system can automatically confirm whether or not the items are in stock, leading to faster and more accurate order processing. The process is further enhanced when the system is able to perform additional tasks such as automatically generating packing slips and alerting warehouses of shipment dates. This leads to reduced order processing and increased customer satisfaction!
Optimised Supply Chain Management: Perpetual inventory systems allow for a more optimized supply chain and improved communication and coordination between stakeholders. Suppliers, manufacturers, and retailers can collaborate better when real-time data is easily accessible and available, allowing for reduced lead times and improved efficiency. Optimization of the supply chain with a perpetual inventory system is also made more achievable when all levels of stakeholders hold integrated systems, alerting when stock levels should trigger a reorder or a new purchase order slip.
Tracking Inventory in Perpetual Inventory Systems
Barcode scanners and inventory management software are all examples of tracking components of perpetual inventory systems. However, specific methods can be applied to these systems. Let us look at FIFO and LIFO, two popular terms within the Intuendi blog-verse!
First-In-First-Out (FIFO) dictates that the first inventory items that reach the warehouse should be the first that are sold to or by the retailer. When applied to the context of a perpetual inventory method, tracking of individual items’ acquisition date and cost becomes far more manageable. The FIFO method offers several benefits, such as minimizing spoilage and obsolescence. This comes as a result of older stock being prioritized before becoming outdated. Additionally, it helps businesses comply with accounting standards, providing a more accurate representation of the cost of goods sold and ending inventory on financial statements.
Last-In-First-Out (LIFO) alternatively assumes that the most recently acquired item of inventory should be sold first. Like FIFO, a perpetual inventory system makes the tracking of an item’s acquisition date an easier feat, allowing the company to adhere to the standards and guidelines of the LIFO method. This method is more common in industries that are often subject to inflation, with some of the benefits and disadvantages centering on this aspect. In times of rising prices, the LIFO method can result in lower taxable income and, consequentially, reduced tax liability for businesses. However, it also can lead to lower ending inventory valuation.
Formulas in Perpetual Inventory Management
Two popular formulas used within the perpetual inventory management systems are the Economic Order Quantity Formula (EOQ) and the Cost of Goods Sold Formula (COGS). EOQ calculates the optimal order quantity in order to minimize holding costs and ordering costs, whereas COGS helps determine the cost of inventory sold during a specific period.
Why Do Companies Use Perpetual Inventory System?
With real-time inventory tracking and accurate stock information, it is no surprise that companies choose to implement perpetual inventory systems. The benefits of this system allows for optimised stock management and the costs associated with it. Improved customer satisfaction results from having products readily available. And streamlined operations allow for faster order fulfilment and reduced manual inventory checks. Informed decisions on restocking, pricing, and supply chain management, along with cost savings, improved profitability, and better overall convenience are all major contributing factors to the popularity of perpetual inventory systems!
Learn how demand planning software linked with an inventory management system can systematically reduce overstock while avoiding stock out events in our free white paper:
