Calculating your inventory is a hectic task. Sure, periodic inventory checks are required to ensure business continuity. But, managing your stock is complex and easier said than done. Fortunately, there’s a modern solution at your fingertips – a perpetual inventory system.
As a business owner, don’t complicate stuff and check out our guide to streamline inventory management and increase profits.
Let’s begin!
What is Perpetual Inventory System? – The Basics
Think about updating inventory levels in real-time! As your business accelerates, you have no time to pause and reflect. Traditional inventory management included periodic updates, and giving snapshots at regular intervals. But consistent and immediate information is the need of the hour.
In such cases, a perpetual inventory system comes to the rescue. Using software that sends automatic updates about sales, transfer of goods, deliveries and other transactions is highly beneficial. (That’s perpetual for you)
Your team will scan inventory items either via barcode or RFID tags. The transactions and SKUs are recorded whenever they come and go, meaning there are minimal chances of errors.
Next, let’s compare perpetual and periodic inventory systems.
Perpetual Inventory Vs Periodic Inventory
Most business owners are confused between perpetual and periodic inventory management. They are wrong as both aren’t the same. Let’s explore the major differences.
| Perpetual Inventory | Periodic Inventory |
| 1. Uses modern software to automatically update and record the company’s ledgers. | 1. Requires manual intervention. |
| 2. Minimal margin of error with easy access. | 2. Higher chances of human errors. |
| 3. Hassle-free deployment of software and related infrastructure. | 3. Requires extensive effort and time to manage inventory. |
| 4. Continuous entries are needed. | 4. It doesn’t follow regular entries as lumpsum quantity is calculated at the end-term. |
| 5. Maintains accurate inventory tracking. | 6. No accuracy and high chances of duplication. |
Next, let’s understand how to implement a perpetual inventory system.
How to Create the Winning Inventory Management System
Wait! Looking to launch your super effective inventory strategy? Are you prepared to witness the highs and lows of the supply chain? We are not here to ruin your mood but logistics can be a dealbreaker if not handled like a pro. Here’s how to implement the perpetual inventory system for long-term growth.
1. Get the Team on Board
First and foremost inform the team, from the sales to finance and warehouse staff, about the changing inventory management. Let all relevant departments understand the change which is being implemented. This will facilitate smoother integration, paving the way for focused growth.
2. Invest in the Right Software
To track COGS(Cost of Goods Sold) in real-time, buying software that suits your business needs is necessary. Scaling, flexibility, and advanced software integration require careful planning. Regarding inventory software, multiple pricing and features are available, but the purchase decision should match your specific needs.
3. Seamless End-To-End Tracking
Perpetual inventory systems can’t function without the support of a tracking system. Use barcode scanners, and RFID tagging to record the merchandise entering your warehouse until it is sold to the client. Point of Sale Terminals efficiently track inventory transactions as they are booked.
4. Smaller SKUs
Transitioning to a newer inventory management system can be daunting. Anything new has to be started small for successful integration. Don’t overload your WMS right off the bat. Specific, quantifiable, and slow integration will get you the results you want.
5. Prioritise Cycle Count Schedule
Implement a daily, weekly, and monthly calendar that updates the perpetual inventory system. Instead of periodic calculations, a regular cycle count will help you hit your inventory goals and KPIs, streamlining the burden of consistent checks and balances.
6. Establish SOPs and Control Policies
In addition to integrating software and trackers, a perpetual inventory system involves the use of operational policies that enforce standard procedures. These policies are guidelines to reconcile pending transactions, handle lost or damaged inventory and ensure regular physical checks to maintain the high accuracy of the system.
7. Employee Training Programs
As discussed earlier, when the entire team is on board, implementing a robust employee training program will be hassle-free and smooth. Businesses must ensure all the workers use the software as per the inventory protocols. This can be done by offering ongoing support, training sessions, and user manuals to the workers.
Let’s shed light on perpetual inventory system examples and formulas to highlight their beneficial features.
Inventory Formulas – Your Ultimate Guidebook
Visualising examples requires understanding inventory management formulas which are the backbone of billion-dollar companies. Let’s explore the top successful formulas in the logistics industry.
- LIFO – The Last-In-First-Out method assumes the recently bought merchandise is sold first. Visualise a stack of plates, the one at the top is the first to go out while the last plate below will be sold at the final stage.
- FIFO – The First-In-First-Out method assumes the first good is cleared first. Imagine a queue where the first person standing in line will get the ticket and move ahead. Businesses base their cost flow decisions on these formulas to track the journey of inventory and goods.
- Weighted Average – The average cost of goods sold for a particular inventory is calculated in the perpetual inventory system without considering the time period. The formula is – Cost of goods available for sale/Total Number of Units in Inventory.
- Economic Order Quantity(EOQ) – This is a formula that helps companies measure the correct order amount by subtracting expenses, warehouse space, and stock supplies.
- COGS – The cost of goods sold in a perpetual inventory system are costs incurred to manufacture commodities over a certain period. They do not include labour, sales, and material charges.
Next, let’s understand the exciting benefits of perpetual inventory calculation.
Advantages of Perpetual Inventory System
Why the need for perpetual systems? Most people ask this question, assuming they are perfectly fine with using legacy infrastructure to calculate the inventory. Well, it’s time to bring the amazing benefits of perpetual calculation into the limelight.
- Real-time updates through a central automated system.
- Inventory replenishment happens seamlessly, eliminating extra waiting and labour charges.
- Easy, simple and user-friendly integration
- Frees up time and resources
- Maintains a positive inventory on the balance sheet.
- No under or overstocking.
Finally, let’s explore the FAQs part of the blog.
FAQs: What is a Perpetual Inventory System? How is it used in eCommerce Systems?
Is perpetual inventory LIFO or FIFO?
Both formulas are used in this inventory calculation method. The count is updated for every purchase and sale as they occur.
What is the most commonly used inventory system?
The FIFO technique is the widely used inventory method to manage stock operations. The oldest products are used first, reducing the chances of spoilage and obsolescence.
Where is perpetual inventory used?
This is the commonly used inventory method in fast-growing eCommerce businesses requiring rapid inventory changes.
Conclusion
Perpetual inventory systems are a boon for supply chain vendors. Demand forecasting, order management, and other data capabilities become easier, facilitating smooth product sales. Do you want to say goodbye to your supply chain problems and gain a bird’s eye view of your inventory? Connect with Qodenext today to resolve all your queries in a jiffy.
