Definition of Perpetual Inventory System
A perpetual inventory system is a method of tracking inventory that uses a central database to maintain real-time, up-to-date inventory records. It’s simply a list of all the items you have in stock at any given time. So, you can use this list to check what items are out of stock/ low on stock so you know when to reorder them.
Other words for it are a perpetual record system or a perpetual stock record.
When to Use a Perpetual Inventory System?
Whether you’re a small or a large business, any type of company that wants scalability can use a perpetual inventory system. However, large businesses or dropshipping companies dealing with enormous quantities of products use it the most.
So, they are especially appropriate when you need very detailed and accurate records of your inventory levels. You will use it if you want to do more than just check whether a piece of equipment is working properly but rather want to be able to see how long it was used and by how many people.
Advantages of a Periodic Inventory System
The most obvious advantage is that you don’t have to worry about keeping track of inventory manually. Read our article on cycle counting to know more about that method of taking inventory. Hence, you will have more time and resources available that can be used elsewhere. For example, if you have employees who have other tasks besides counting items in the store, they no longer have to do this task manually. Instead, they can focus on more important things like training new employees or taking care of customers.
Also, it allows companies to keep track of their inventory at all times, so unexpected stockouts or forced shutdowns don’t happen. Additionally, it helps companies avoid situations where they lose money by having too much inventory on hand because they didn’t know how much was being sold.
Disadvantages of a Periodic Inventory System
The main disadvantage is that it takes some time to set up. Especially, if you’re moving from an Excel spreadsheet to software. Once it’s set up though, it’s not difficult at all to use – it will, in fact, make processes much more efficient.
Another pitfall could be the complexity and involved cost of acquiring software to implement a periodic inventory system. For this reason, many companies use semi-perpetual or periodic systems instead. Note that you still have to do an annual inventory count to synchronize your data. At last, you need to record every transaction meticulously because the software requires consistent record-keeping to work properly.
Economic Order Quantity (EOQ)
Economic Order Quantity calculates the holding cost and the cost-to-order of inventory. That’s why managers use it to decide how much new inventory the company needs.