Periodic vs. Perpetual Inventory Systems – Pros and Cons of Each
To maintain smooth operations, business owners and managers must invest in some form of product monitoring which assesses the flow of their goods and services. Failure to review the flow of goods in business could lead to potential waste and trading losses which are all easily avoidable with the use of an inventory system.
Depending on the size of the business, managers must determine whether a periodic inventory or a perpetual inventory system is optimal.
In this article, we consider the advantages and disadvantages of periodic and perpetual inventory systems.
Comparing a Periodic vs. Perpetual Inventory System
Traditionally, inventory systems were managed manually by a store manager who took stock of goods at fixed points in a production cycle. This is considered a periodic inventory method. A modern alternative to this is the perpetual inventory system which is continuous monitoring of the flow of goods in and out of a business.
While periodic inventories are the cheaper process, conducting one for a larger business might prove to be an arduous task as it is time-consuming and requires dedicated manpower. On the other hand, a perpetual system can be faster but more costly in some instances.
What is a Periodic Inventory System?
A periodic inventory system involves taking a physical inventory count of all inventory items at specific intervals to assess stock levels. Unlike continuous inventory systems that track inventory in real-time, a periodic system provides an updated inventory count only at the times when stock counts are conducted.
How It Works
In a periodic inventory system, inventory counts are performed at set intervals, such as weekly, monthly, quarterly, or annually. This method gives a snapshot of inventory levels at the time of counting but does not provide ongoing updates between these intervals. To perform a periodic inventory, you typically count all stock manually or use a spreadsheet or inventory management software to record the quantities.
Frequency of Counts
The frequency of inventory counts depends on factors like the size of the inventory, the volume of transactions, and the business’s needs. For example, a small business might conduct physical counts monthly, while larger operations might opt for quarterly or annual counts.
Pros of Periodic Inventory Systems
There are various benefits and drawbacks of a periodic inventory system are outlined below.
Lower Start-up Costs
A periodic inventory system requires very few materials to be properly conducted and this translates to a significantly lower cost of setup. This makes a periodic system ideal for smaller businesses running on a tight budget.
Simplified Record-Keeping Style
The structure of a periodic system is very simple and easy to understand as it usually shows three basic parameters:
- The number of items currently in stock
- The number of items purchased
- The number of items sold
Having just these three items on the spreadsheet makes analyzing the data and making the necessary adjustments a straightforward process. Additionally, using the purchases account to track inventory purchases helps in managing cost of goods sold and maintaining accurate records.
Minimal Experience Needed to Implement
Due to its simple manual design, a periodic inventory system can be efficiently handled by anyone with a basic knowledge of mathematics. The absence of complex technology eliminates the need for specialized training and store managers can start operating the system from the first day of setup.
Flexibility in Implementation
Periodic systems are flexible and can be adjusted to fit various business needs. They don’t require constant monitoring and can be scheduled based on the business’s specific requirements, often aligning with the accounting period for accurate financial reporting.
Cons of Periodic Inventory Systems
Regularly conducting physical stock counts can be time-consuming and labor-intensive, potentially leading to disruptions in daily operations and inaccurate inventory records between counts.
Diversion of Valuable Man Hours/Increased Overtime Costs
Using a periodic inventory system requires the dedication of employees to the task of manually counting every single item in the inventory. This will divert valuable man-hours that could have been spent in other productive activities to a repetitive task. Also, employers who seek to avoid man-hour losses might have to pay their staff overtime to perform the inventory checks outside official work hours resulting in higher overall operating costs.
Higher Chance of Errors
Humans are more error-prone than computers and as such are more likely to make mistakes during the inventory process. Typical periodic inventory system errors made during manual collation include miscounting, double counting, wrong calculations, and data misrepresentation/wrong input on spreadsheets.
Limited Insights
Periodic systems only provide a snapshot of inventory records at specific intervals, which can result in outdated information. This lack of real-time data can make it challenging to respond quickly to stockouts or overstock situations.
Potential for Disruptions
With a periodic inventory system, regular physical counts can disrupt daily operations, especially during busy periods. The time and effort required to conduct these counts can affect overall business productivity and efficiency.
Inaccurate Inventory Valuation
Since periodic inventories are not updated in any given time, the valuation of inventory can be less accurate, affecting financial reporting and inventory management decisions.
What is a Perpetual Inventory System?
A perpetual inventory system, also known as a continuous inventory system, offers a dynamic approach to inventory management by tracking inventory levels in real-time. This system automatically updates inventory data as items are sold, restocked, or otherwise modified, providing an accurate and up-to-date view of inventory at all times.
How It Works
In a perpetual inventory method, every transaction—whether it’s a sale, return, or restocking—is recorded instantaneously. This tracking is facilitated by various technologies such as Point of Sale (POS) systems, RFID (Radio Frequency Identification) scanners, computer software, and barcodes. These tools continuously feed data into a central inventory management system, allowing businesses to monitor stock levels, manage orders, and analyze inventory trends without delay.
Technology and Integration
- Barcodes: Simplify the scanning process for inventory changes, ensuring accurate and immediate updates.
- POS Systems: Track sales and returns at checkout, automatically adjusting physical inventory counts.
- RFID Scanners: Use radio waves to capture and transmit product data, streamlining inventory tracking and management.
- Computer Software: Provides real-time inventory updates and detailed reporting, often integrated with other business management tools.
Pros of Perpetual Inventory Systems
The advantages and disadvantages of a perpetual system are outlined below.
Active Inventory Surveillance
Tracking your inventory turnover in real-time allows you accurately predict periods of deficits allowing you to quickly adjust before shortages become detrimental to productivity. In a perpetual inventory system like vendor-managed inventory (VMI) from DXP, this is one of the core VMI benefits.
Seamless Management of Multi-sourced Data
Perpetual inventory management systems plug into a central gathering hub that can efficiently collect and interpret data from multiple sources. This makes it ideal for larger operations where multiple locations are being managed.
Predictive Analysis
Information gathered from consumer purchasing habits can be used to predict future buying patterns, allowing businesses to optimize their inventories for periods of high demand as well as times of slower sales. This lead time reduction in inventory management is one of the main benefits of a perpetual system.
Enhanced Accuracy and Reduced Stockouts
With continuous updates, perpetual systems minimize errors associated with manual counting and reduce the likelihood of stockouts. This accuracy supports better decision-making and helps maintain optimal inventory levels.
Cons of Perpetual Inventory Systems
While offering real-time updates, perpetual systems can be costly to implement and maintain, requiring ongoing investment in technology and staff training.
Higher Start-up Costs
Setting up a perpetual inventory management system is associated with significantly higher costs when compared to a periodic system. This is because a perpetual system requires multiple specialized components (RFID codes, scanners, computer software) that contribute to a high cost of setup.
Ongoing Maintenance and Training
Maintaining a perpetual inventory system involves regular updates, system checks, and staff training. The need for continuous investment in technology and personnel can add to the long-term operational costs.
Complexity
The advanced technology required for perpetual systems can be complex to set up and operate. This complexity may necessitate additional training and support, further increasing costs and requiring a commitment of time and resources.
Potential Over-reliance on Technology
While technology offers accuracy, an over-reliance on automated systems may lead to vulnerabilities if technical issues arise. Businesses need contingency plans to manage and mitigate any disruptions caused by system failures.
However, with the right partner for VMI implementation, higher start-up costs aren’t always a given.
Should Your Business Use a Perpetual Inventory System vs. Periodic Inventory System?
Choosing between a perpetual and periodic inventory system comes down to your business’s specific needs, size, and budget. For smaller businesses or those with tighter budgets, a periodic system might be more practical. It’s cost-effective and straightforward, suitable for companies that don’t require real-time inventory updates. This approach involves regular physical counts and can be managed with less complex tools and processes, including maintaining a purchases account for tracking inventory purchases.
On the other hand, larger businesses with more substantial resources and complex inventory requirements often benefit from a perpetual system. This system provides continuous, real-time tracking of inventory, which helps in maintaining accurate stock levels, improving order fulfillment, and minimizing stockouts and overstock situations. While more expensive and requiring advanced technology and ongoing maintenance, the increased efficiency and data accuracy make it a worthwhile investment for businesses with the capacity to support such systems.
DXP Has Supply Chain Management Solutions for Most Industrial Settings
At DXP, we offer top-notch supply chain management solutions to a broad clientele base. Our inventory management services are tailored to your business model, so that the payback for new efficiencies is kept to a minimum. For organizations seeking to optimize how they conduct business, ask about our vendor-managed inventory services.
Contact us online today to learn more about the inventory control services we offer.