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.
As the name indicates, perpetual inventory systems are always āperpetuallyā 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.
The term āperiodicā is essentially antonymous to āperpetualā. 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.
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, itās the best choice for businesses with high sales volumes.
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.
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.
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.
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.
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.
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 donāt suit some businesses.
Need for Physical Stock Counts
A perpetual inventory management system alone isnāt enough for precision in stock readings, therefore, coupling it with physical counting is required.
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.
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.Ā 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.
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.
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