Inventory management is critical to keeping any retail business afloat. Overstocking, high warehouse costs, and the inability to predict new trends could happen if it doesn’t have it. In addition, ineffective inventory management causes consumer discontent due to delivery delays and out-of-date goods.
Inventory systems can ensure enough products are in stock to keep up with customer demand. One of the more popular methods to do this is the perpetual inventory system.
Perpetual inventory is a computerized point-of-sale system that records inventory changes in real time. This automation eliminates the need for manual inventory inspections. It can adequately reflect the number of goods on hand and offers a detailed view of inventory changes. Plus, it immediately reports any changes in the inventory in stock.
With this approach, a business no longer needs to manually maintain a thorough record of the products it has on hand. Instead, purchases get noted as debits to the inventory database. Aspects like direct labor, material expenses, and direct factory overhead costs are included in the price of goods sold.
It’s different from a periodic inventory system which keeps track of its inventory by routine physical counts. Businesses using this model struggle with inventory information that is out-of-date and potentially inaccurate. To prevent stockouts, business owners must have accurate demand projections and inventory levels.
How the Perpetual Inventory System Works
The perpetual inventory system automatically updates inventory levels when goods are purchased or sold. It’s made possible with the help of a point-of-sale (POS) system. When inventory reduces, a point-of-sale system adjusts inventory levels. Accordingly, every time there’s a sale, the account for the sales cost increases. When inventory reports can be accessed online, it is easier to control inventory levels and budgets.
Due to the continuous updates, businesses are always aware of the products and services selling well and the low inventory.
Here is a step-by-step look at how the entire system works:
1. Monitor Changes in the Inventory
Barcode/RFID scanners can transmit data to the inventory management software when an item in your inventory is sold or used for production. It updates the general and inventory ledgers and applies the debit to the entire system. The process for receiving things and adding them to the inventory would be the same.
2. Update Cost of Goods Sold (COGS)
Your COGS is automatically updated and recalculated using the information from the previous step. It’s made possible with the first-in, first-out (FIFO), last-in, first-out (LIFO), or whichever weighted/moving average costing method you use.
3. Adjust Reorder Points
With the data gathered, your system changes the reorder points (ROP), which is the minimal number any item in your inventory must reach to trigger replenishment.
4. Generate New Purchase Orders
Based on the ROP, your system automatically generates purchase orders (PO) as needed to ensure that your inventory is always fully stocked. Creating and transmitting POs (to suppliers) are automated processes that don’t need any manual inputs.
5. Monitor New Inventory
The process comes full circle as your warehouse staff scans and adds the newly obtained inventory to their warehouse management system. The system will then update your databases accordingly. This makes the items visible in your inventory management dashboard and available on your sales channels.
Four Ways a Perpetual Inventory System Benefits Inventory Management
A perpetual inventory system can be highly advantageous for businesses of all sizes. In the past, checking inventory discrepancies required calling someone into the warehouse. It frequently involved sending someone to count all the inventory physically. This manual process could take hours or even days to perform. It could take longer if you have a lot of stock on hand. That’s why firms benefit from the perpetual system. The procedure is quick and easy, saving businesses time.
1. Real-Time Data Monitoring
As soon as a sale or purchase occurs, a perpetual inventory system detects changes in inventory levels. Businesses benefit from constantly knowing which products may run low to avoid stockouts or shortages.
This is especially helpful if you’re in charge of a large company with multiple warehouses and operates out of several locations. A perpetual inventory system enables you to easily manage everything through a single, centralized, automated system.
2. Accurate Inventory Information
A perpetual inventory system keeps track of inventory movements and interactions throughout your eCommerce supply chain. More information about bottlenecks will be revealed by this data, allowing you to improve your supply chain.
This avoids the buildup of slow-moving goods, which can negatively affect your company. The stock turnover ratio is calculated accurately under this system, with stock quantities being highly accurate. The turnover ratio is the most important metric for determining how well a business owner manages his inventory and generates sales.
3. Efficient and Prevents Errors
This system helps your company save time, money, and guards against potential human accounting mistakes.
Inventory replenishments and holding expenses are managed and reduced with real-time data. Perpetual inventory systems can also reduce labor costs since they automate numerous manual operations. Although initial setup costs may be expensive (depending on the size of your organization), they can also reduce staffing. You will eliminate employees doing daily manual checks and counts, saving time and money.
4. Aids in Planning & Forecasting
Demand forecasting is made simple with a real-time inventory system. To forecast upcoming sales cycles and make sure you have the right quantity of inventory. Doing so at key points throughout the season, such as the holidays, you need to analyze historical inventory and sales data.
Businesses can learn more about the customers’ purchasing habits, top-selling goods, and expanding market categories.
Getting Started with a Perpetual Inventory System
Choosing a perpetual inventory system is the first step to optimizing your inventory management. However, you’ll also need to upgrade your technology and service providers to make the most of it.
With the necessary inventory management procedures, firms can do order fulfillment correctly. With third-party logistics (3PLs), merchants can outsource fulfillment, including warehousing, inventory management, pick and pack, and shipping.
As mentioned previously, perpetual inventory systems work best thanks to POS systems. They are hands-off software, but that doesn’t mean it operates autonomously. You’ll still need staff to receive new shipments and manually scan each item’s barcodes to ensure they get logged into the system.
Of course, there are better solutions to your inventory management issues. You must consider several factors while upgrading your inventory and the cost of goods sold. To ensure that you’re hitting your expected revenues, compare your stock prices to your sales first. In addition to buying merchandise, take other expenses into account, like assembly, shipping, and insurance. To know you are ordering the appropriate quantity, compare the traffic of the entering inventory and the existing inventory. When you receive your items, the cost of inventory continues. Keeping your goods in storage will drive up your costs.
There is no need to update your accounting once a year as a perpetual system does not rely on physical inventory counts like a periodic inventory system. It’s essential to update your inventory constantly. Otherwise, it might be difficult to discover inaccurate, lacking, or damaged stock unless you want to do a physical count. Even worse, if there isn’t an audit of inventory counts, fraud could happen more quickly. Every account should line up when you verify your records. If they don’t, look for system faults and compare the results with a physical inventory to consider any further errors.
Consider the location diversity of your warehouse, inventory volume, and budget when implementing a perpetual inventory system. The advantages of the perpetual inventory system outweigh the drawbacks for most organizations with extensive inventories. The time and effort needed to count their merchandise physically are significant factors. A perpetual system automatically generates many transactions, resulting in large databases useful for all company processes. The infrastructure needed to implement this strategy accurately is substantial and may only be feasible for some businesses.
A perpetual inventory system is the best option for eCommerce companies that are expanding quickly.A periodic inventory system has weaker stock control and a significant likelihood of discrepancy. You can centralize inventory management, optimize stock levels, and do much with a perpetual inventory system.