Inventory Management

What is a Perpetual Inventory System, and Why Do You Need One?

Jul 27, 2022

If you’re still manually counting inventory, you’re missing out on big benefits from a perpetual inventory system. Read on to learn more.

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Andrew ConradSr Content Writer
What is a Perpetual Inventory System, and Why Do You Need One?

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When it comes to inventory management, there are two primary ways that businesses can keep track of all the stock coming in and going out of their warehouse: a periodic inventory system or a perpetual inventory system.

In a periodic inventory system, an inventory manager physically counts inventory on a regular basis and then updates a spreadsheet. In a perpetual inventory system, inventory levels are automatically updated in a centralized database every time physical inventory is scanned in or out.

If you help run a small business that is struggling to stay ahead of inventory issues, you may be grappling with this question: which inventory system should we use to get this under control?It’s a crucial question to ask, considering that 91% of small businesses feel like they’re at a disadvantage compared to larger companies when it comes to procuring inventory, according to our recent SMB Retail Supply Chain survey [*]. This disadvantage is much more than just an inconvenience, as failing to successfully manage your inventory could derail your business.

In this article, we’ll look at how perpetual inventory systems work, and how you can start using one to make your inventory management more effective and efficient so that you can identify and resolve issues before they undermine your business.

What is a perpetual inventory system?

A perpetual inventory system is a type of technology-enabled inventory management system that updates inventory levels automatically and instantaneously every time new physical inventory enters or exits a business.

For retailers, a perpetual inventory system can be enabled through a point-of-sale system that updates every time a sale is registered or new product is scanned in, while larger distributors can enable perpetual inventory management through an inventory management system. These businesses will sync their inventory with the software using barcode or RFID scanners which automatically updates inventory levels every time a new shipment is scanned into the facility or an outgoing order is scanned out.

Since perpetual inventory management updates inventory levels in real time, it enables inventory managers to get information and take action faster. For example, if an auto parts distributor experiences a spike in demand that depletes their supply of spark plugs on Wednesday, their perpetual inventory system will reflect this immediately, and they can put in an order for more plugs by the end of the day.On the other hand, an auto parts distributor using a periodic inventory system might not manually check their inventory levels until the end of the week, or month, when their supply of spark plugs is already completely depleted, resulting in lost revenue and cash flow.

Want to see what a perpetual inventory system looks like behind the scenes at a hospitality company? Check out this video:

Perpetual Beverage Inventory Training Video (Source)

Which inventory system should you use for your business?

Unless your business is very small and you have very limited inventory, you’ll be best served by a perpetual inventory system. A perpetual inventory system requires more upfront cost and more technology, but requires less manual labor in the long run, and yields faster, more accurate information.

On the other hand, a periodic inventory system takes much less effort to get started, but requires much more effort in the long run and is prone to inaccuracies due to human error.

perpetual inventory graphic update

If your business is just getting started and you have very limited inventory, it’s not a bad idea to start off with a periodic inventory system, and then upgrade to a perpetual inventory system as your inventory grows. Just remember that the earlier you get started with a perpetual inventory system backed by inventory management software, the better off you’ll be in the near and distant future.

That’s because a software-based inventory management system is not only faster and more accurate than manual, periodic inventory management, but it can also collect reams of inventory data that can be used to forecast future inventory levels, track inventory price trends, and even create automatic reorders.This, according to business leaders, can improve many facets of your business in a holistic way that goes far beyond simply making your inventory management more efficient.

“While it can feel like an overwhelming task for a smaller business to begin, building and maintaining a data-driven inventory management strategy can reap many benefits, including increased cost savings and customer satisfaction, disruption-proofing, and stronger supplier relationships,” says Stephen Light, CEO of Nolah Mattress [1], a San Antonio-based mattress company.

How can a data-backed approach to inventory management yield all these diverse benefits? Let’s take a closer look:

  • Increased inventory cost savings: By analyzing inventory data, businesses can stock up on inventory when they know costs are low, reduce costly excess inventory based on forecasting, and more.

  • Improved customer satisfaction: Data-driven inventory forecasting can help businesses anticipate sudden increases in demand, which allows them to increase inventory ahead of time to prevent snags that result in delays for their customers.

  • Disruption proofing: With enough data to derive consistently accurate insights, businesses can anticipate supply chain disruptions and shortages and make alternate plans with backup suppliers before these issues snowball into bigger problems.

  • Stronger supplier relationships. A constantly up-to-date perpetual inventory system can help businesses create automatic reorders when inventory levels hit a certain threshold.This consistency can help build loyalty and rapport with suppliers.

How do you set up a perpetual inventory system?

As we’ve seen in this article, the benefits of a perpetual inventory system greatly outweigh the costs in the long run. But setting up a perpetual inventory system can take a lot of time, effort, and resources. While not exhaustive, the following checklist should get you started on the right foot:

Perpetual inventory system checklist

  1. Designate an inventory manager or clerk. Even though a perpetual inventory system does a lot of heavy lifting on the backend, it still needs a watchful human eye to oversee inventory tracking and make sure everything is in order, just like a train needs an engineer.

  2. Select an inventory management software system. You can run inventory manually with a spreadsheet, but you can’t effectively run perpetual inventory without dedicated software. That’s because the software works to constantly keep inventory levels synchronized and up to date.

  3. Begin collecting data. Many of the biggest benefits of a perpetual inventory management system (forecasting, reporting, automated reorders) depend on a sufficient pool of historic data (goods sold, stock levels, inventory shrinkage, etc.). The sooner you start collecting this data (either via a spreadsheet or inventory software) the sooner you can start to enjoy these benefits.

  4. Roll out your electronic scanners. Whether you already have barcode or RFID scanners in place, your inventory management software vendor can help recommend hardware devices that work best with your new system.

  5. Train your staff on how to use your new perpetual inventory system. Your inventory manager should be responsible for training warehouse or storeroom staff on how to use handheld scanners to log every shipment that comes into or goes out of your facility so that your system is constantly up to date with real-time data.

  6. Audit your perpetual inventory system regularly. Even after your perpetual inventory system is working effectively, it’s a good idea to perform regular audits to make sure nothing is falling through the cracks between beginning inventory and ending inventory due to user error or even theft.

Start by selecting software to get your perpetual inventory system up and running

In this article, we looked at how perpetual inventory systems work, and why you should strongly consider using one for your inventory-centric business.

If you’re not already using a software-based inventory management system, selecting one should be your next step, since all perpetual inventory systems are software-based.

Once you’ve done that, don’t forget to look back at these important steps for jumpstarting your perpetual inventory system:

  1. Put someone in charge of your inventory management.

  2. Gather as much inventory data as you can.

  3. Deploy inventory scanning hardware.

  4. Train all relevant staff on how to use your perpetual inventory system.

  5. Audit your system regularly.

The good news is that inventory management systems do much more than just enable perpetual inventory management.

For example, inventory management software can help businesses create automatic recurring orders, manage a warehouse with pick-and-pack assistance, communicate behind the scenes with vendors, and even use AI-powered inventory forecasting to predict future demand.

That’s just a short preview, but when you’re ready to explore inventory management systems that best suit your business needs, we have you covered. Our 2022 Category Leaders in Inventory Management features 15 top-rated inventory management products based on thousands of verified user reviews (full methodology here).

inventorymanagement categoryleaders

GetApp’s 2022 Category Leaders in Inventory Management (Source)

Note: The applications mentioned in this article are examples to show a feature in context and are not intended as endorsements or recommendations. They have been obtained from sources believed to be reliable at the time of publication.

Methodology

*GetApp conducted the SMB Retail Supply Chain Survey in March 2022 of 305 U.S-based supply chain/inventory management managers in retail small/midsize businesses. Respondents were screened for size of business (one to 1,000 employees), involvement in procurement and inventory management at their retail company (very to extremely involved), and that they had experienced at least minimal supply chain delays in the past 12 months.

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About the author

Andrew Conrad

Sr Content Writer
Andrew Conrad is a senior content writer at GetApp, covering business intelligence, retail, and construction, among other markets.

As a seven-time award winner in the Maryland, Delaware, D.C. and Suburban Newspapers of America editorial contests, Andrew’s work has been featured in the Baltimore Sun and PSFK. He lives in Austin with his wife, son, and their rescue dog, Piper.
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