Perpetual vs Periodic Inventory System: Understanding the Differences
Post Date/Time:- 15 October 2024 at 10:25:48
There's no denying that inventory is the heart and soul of any retail business. No matter whether you are running a large manufacturing unit or a small store, efficient inventory management is important. It can help forecast demand, prevent stockouts and overstocks, and save costs. Two popular methods to manage inventory are Perpetual Inventory System and the Periodic Inventory System. Each of these methods has its own advantages, disadvantages, and use-cases.
In this blog post, we will breakdown the differences between perpetual and periodic inventory systems. This comparison will certainly help you decide which one suits your business best. So, let's get started!
What is a Perpetual Inventory System?
A perpetual inventory system is designed to regularly track stock levels in real-time. Every time a sale, purchase, or return is made, this system updates the stock records. This gives businesses a 360°, comprehensive, and up-to-date view of stock levels. It operates with the help of technology like barcode scanners, point-of-sale (POS) systems, and RFID tracking. This makes it highly automated, effective, and precise.
How It Works -
- Every transaction (sales, purchases, returns) is immediately recorded and reflected in the system, ensuring that stock records are always accurate.
- Inventory-related data is stored electronically, reducing the need for manual checks.
- With this inventory management system, businesses can easily monitor stock and reorder items when levels get low to avoid lost sales.
Importance and Features -
Real-time Accuracy: The system keeps an accurate and continuous count of stock. This is particularly helpful for businesses with high sales volume or those dealing with large inventories.
Cost Control: Real-time data helps businesses avoid the risks of overstocking or running out of products, allowing for better financial planning.
Tech Integration: The use of technology ensures that supply chain processes are efficient and reduces human errors. With integrations like POS and RFID, businesses can track stock from the point of purchase to the point of sale.
Better Demand Forecasting: With up-to-date inventory data, businesses can make well-informed decisions about future inventory needs to meet consumer demands.
For Example :-
There is an e-commerce store that deals with large inventories as well as order volumes. With a perpetual inventory system, they can easily keep track of their stock levels, reorder before stock runs out, and fulfill orders on time. This gives them a competitive edge in the market with enhanced customer satisfaction and profitability.
What is a Periodic Inventory System?
The periodic inventory system operates quite differently. Unlike perpetual, the period inventory system records stock levels at specific intervals, such as weekly, monthly, or quarterly. Businesses using this system don’t track inventory on an everyday basis. Instead, they perform physical counts during the set period to update inventory data.
How It Works -
- Inventory is only counted, recorded, and updated at the end of each period.
- During the period, sales and purchases are recorded separately from the inventory balance.
- The stock levels are adjusted based on a physical count, and the cost of goods sold (COGS) is calculated accordingly.
Importance and Features -
Simplified Processes: For small to midsized businesses with low inventory volumes, this method is simpler and more cost-effective. It doesn't require the latest technology or regular updates.
Manual Approach: This system primarily relies on physical counts and manual reconciliation. This can work well for businesses with low stock turnover or smaller inventories.
For Example :-
Consider a small local bookstore. Since they don’t sell hundreds of books daily, they may not need to track inventory every single day. Thus, periodic physical count at specific intervals is sufficient for them. They can reconcile their inventory, manage orders, and plan restocking.
Perpetual vs. Periodic Inventory Systems: What's the Difference Between Them?
Let's explore the key differences between perpetual and periodic inventory management systems:
| Perpetual |
Periodic |
| 1. Frequency of Inventory Updates: Here, the inventory levels are updated continuously, as and when a transaction takes place. Whether it's a sale, purchase, or return, the stock level is adjusted immediately. Thus, businesses can avoid lost sales due to stockouts and expenses due to overstocks. |
1. Frequency of Inventory Updates: In contrast, here, businesses rely on a physical count to update stock levels. The periodic system only updates inventory records at the end of a specific period, such as a month or a quarter. This results in less frequent updates, making it harder to track inventory on a regular basis. |
| 2. Technology Integration: This high-tech system relies on technology like barcode scanners, POS systems, RFID tracking, and warehouse management software to track inventory in real time. |
2. Technology Integration: This manual method requires less extensive tech integration. Although it is simple, but it lacks technological benefits and can be labor-intensive. |
| 3. Real-time Inventory Accuracy: This particular system offers higher levels of inventory accuracy because it tracks every transaction in real time. |
3. Real-time Inventory Accuracy: However, the periodic system can have some discrepancies as inventory is manually and periodically updated. |
| 4. Cost of Implementation: The perpetual inventory system can have more upfront costs due to the need for software, hardware, and staff training. However, the long-term benefits of inventory accuracy often outweigh the costs for larger businesses. |
4. Cost of Implementation: It is comparatively an affordable option. It is suitable for businesses with lower budgets and lesser sales volumes. |
| 5. Business Size: Ideal for larger businesses with higher sales volumes or complex supply chains. |
5. Business Size: Best suited for smaller businesses with limited inventory, that don’t need constant updates. It is also a good fit for businesses with seasonal sales, where inventory counts are more manageable during slower periods. |
Which Inventory Management System is Better for Your Business?
Choosing the right inventory system certainly depends on your business’s size, transaction volume, and resources available.
Here are some use-case scenarios for both perpetual and periodic inventory systems:
When to Choose a Perpetual Inventory System -
E-commerce or Retail Stores: For businesses that sell through various channels (physical stores, online, etc.), having accurate stock data is crucial to fulfilling orders efficiently.
Large Businesses or High Transaction Volumes: Companies with a high number of daily transactions, such as supermarkets or online retailers, will benefit from real-time updates.
Multi-Location Businesses: If you operate multiple warehouses or store locations, having a live view of stock across all sites is essential.
When to Choose a Periodic Inventory System -
Small Businesses or Startups: If your business doesn’t deal with large inventories, a periodic system is sufficient and suitable.
Businesses with Limited Resources: For companies that want to avoid the upfront costs, the periodic system provides a simpler yet more affordable alternative.
Businesses with Seasonal Inventory: If your inventory fluctuates based on seasonality (for example, a festive decor store), you may not need to track stock regularly.
Bottom Line
Both perpetual and periodic inventory systems have their importance in effective inventory management. The key is understanding the specific needs of your business. Larger enterprises with complex supply chain operations may find the perpetual system’s real-time tracking more useful. In contrast, smaller or seasonal businesses might enjoy the cost savings and simplicity of the periodic system. Whatever your choice, a well-managed inventory management system is vital to reducing costs and improving operational efficiency.
