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.
Periodic vs. Perpetual Inventory Systems
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 real-time 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 inventory system can be faster but more costly in some instances.
What Is a Periodic Inventory System?
A periodic inventory simply means taking physical stock of every single item in stock at a fixed point. While this gives an exact estimate of all the products available at the point of stock-taking, it does not account for a continuous, daily estimate.
Periodic inventories can be done once a week, monthly, at the end of every quarter, or annually based on the size of the items in stock. This inventory type is usually conducted manually using a physical or computer-based spreadsheet.
Pros and Cons of Periodic Inventory
There are various benefits and drawbacks of a periodic inventory system are outlined below.
Lower Start-up Costs
Periodic inventory requires very few materials to be properly conducted and this translates to a significantly lower cost of setup. This makes periodic inventory ideal for smaller businesses running on a tight budget.
Simplified Record-Keeping Style
The structure of a periodic inventory 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.
Minimal Experience Needed to Implement
Due to its simple manual design, a periodic inventory 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.
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 errors made during manual collation include miscounting, double counting, wrong calculations, and data misrepresentation/wrong input on spreadsheets.
What Is a Perpetual Inventory System?
A perpetual inventory system (AKA a continuous inventory system) keeps track of all items sold and restocked in real-time. This system automatically updates available data and notifies operators any time changes occur in their inventories.
The information gathered by a perpetual inventory system is stored in a central hub that can be accessed by an authorized person at any given time. A continuous inventory system can be facilitated by POS systems, RFID scanners, computer software, and barcodes.
Pros and Cons of Perpetual Inventory
The advantages and disadvantages of a perpetual inventory 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.
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.
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.
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?
Having established the benefits and drawbacks to both inventory systems, the choice of management system largely depends on the size of your business as well as the budgetary allocation for inventory management.
If you run a smaller business with a limited budget, a periodic system is the most ideal system to operate. However, for larger businesses with more upside and less restriction on supply chain investments, a perpetual inventory system is the more efficient choice.
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 services we offer.