Inventory is the lifeblood of your business. You need enough inventory in stock to keep up with customer demand, but not too much that you are overpaying on storage costs. That’s where an inventory system comes into play.
The perpetual inventory system is a reliable way to keep track of inventory in real-time. Read on to learn what a perpetual inventory system is and how it works.
What is a perpetual inventory system?
A perpetual inventory system is an inventory management method that records when stock is sold or received in real-time through the use of an inventory management system that automates the process. A perpetual inventory system will record changes in inventory at the time of the transaction.
How does the perpetual inventory system work?
A perpetual inventory system works by updating inventory counts continuously as goods are bought and sold. This inventory accounting method provides a more accurate and efficient way to account for inventory than a periodic inventory system. Here is a step-by-step overview of how this type of inventory system works.
Step 1: Point-of-sale system updates inventory levels
Whenever a product is sold, the inventory management system attached to the POS (point-of-sale) system immediately applies the debit to the main inventory across all sales channels. Barcodes or RFID (radio-frequency identification) scanners make this process quick and easy.
Step 2: Cost of goods sold is updated automatically
Whenever a product is sold or received, the cost of goods sold (COGS) gets recalculated.
Step 3: Reorder points are adjusted frequently
Based on historical data, a perpetual inventory system will automatically update reorder points as sales increases or decreases to keep an optimal level of inventory at all times.
Step 4: Purchase orders are automatically generated
Whenever an item or SKU hits its reorder point, the system generates a new purchase order and sends it to your supplier with no human intervention.
Step 5: Received products are scanned into inventory
When inventory is sent to your warehouse, a warehouse employee will scan product using a warehouse management software (WMS), so they appear in your inventory management dashboard and make them available for purchase on all or select sales channels.
What are the advantages of a perpetual inventory system?
A perpetual inventory system has a lot of advantages for ecommerce businesses of all sizes. Not only does it help track inventory data in real-time, but it also helps eliminate labor costs and human error. Let’s look at why ecommerce businesses choose to use a perpetual inventory system.
Records data in real-time
A perpetual system records inventory updates and movements as they happen. This means you can trust your inventory counts to be accurate at all times.
Provides a detailed paper trail
A perpetual inventory system tracks inventory movements and interactions throughout your ecommerce supply chain. This data will give you more insights about bottlenecks in your procedures, so you find ways to optimize your supply chain.
Decreases inventory management costs
With real-time updates, inventory holding costs and inventory replenishments are controlled and minimized. Since perpetual inventory systems automate many processes that would be manual, it can save on labor costs.
Calculates end-of-year inventory balance
Since a perpetual inventory system accounts for inventory continuously, your end-of-year inventory balance is calculated instantaneously when the year ends. This helps to make sure you have accurate inventory numbers to report on for accounting purposes.
Forecasts demand more accurately
A real-time inventory system makes forecasting demand simple. Historical inventory and sales data can be used to predict future sales cycles and ensure that you have an optimal amount of inventory during different times in the season, such as the holidays.
What’s the difference between a perpetual inventory system and a periodic inventory system?
Periodic and perpetual inventory systems are two different inventory tracking methods that ecommerce businesses use to track and monitor stocked goods. The perpetual inventory system is more advanced and used more often than a periodic system.
A perpetual inventory control system tracks inventory in real time and centralizes inventory data. Inventory data is available to all parts of the system to forecast sales trends, calculate reorder points, and source items that are currently out of stock.
A periodic inventory system is kept up to date by a physical count of goods on hand at specific intervals to calculate COGS using inventory valuation methods such as FIFI, LIFO, and weighted averages. With a periodic inventory system, a business calculates current inventory counts at the end of an accounting period or financial year and reports on it.
Formulas used in perpetual inventory methods
In order to be more precise when ordering inventory items, formulas can be used. There are several formulas business owners can use to keep track of physical inventory counts. Here is a list of our favorites.
EOQ, or economic order quantity, is designed to find the optimal order quantity for businesses to minimize certain things like costs, warehousing space, and stockouts.
EOQ = square root of: [2SD] / H
S = Setup costs (per order, generally including shipping and handling)
D = Demand rate (quantity sold per year)
H = Holding costs (per year, per unit)
Finished goods inventory refers to the stock available to customers for purchase that can be fulfilled. With the finished goods inventory formula, sellers can calculate inventory cost.
Formula: (COGM – COGS) + Value of Previous Year’s Finished Goods
FIFO (first in, first out) is an inventory valuation method that sells the goods purchased first before goods purchased later. In theory, this means the oldest inventory gets shipped out to customers before newer inventory.
LIFO (last in, first out) is an inventory valuation method that uses the cost of the most recent products purchased to calculate the cost of goods sold (COGS), while older inventory value is considered ending inventory on a balance sheet.
Weighted average cost
Weighted average cost is an accounting system that uses a weighted average to determine the amount of money that goes into COGS and inventory.
Formula: Cost of goods available for sale / Total number of units in inventory
How to optimize your inventory management processes
Choosing a perpetual inventory system over one that is manual and time-consuming is the first step in managing inventory. But you also need the right technology and partners to optimize your inventory tracking systems and processes.
Order fulfillment can’t be done properly without the right inventory management process in place. Third-party logistics (3PLs) allow merchants to outsource fulfillment, including warehousing, inventory management, pick and pack, and shipping. With ShipBob, you can spend less time on inventory management tasks, while still having full visibility into the fulfillment process.
Skubana partners with ShipBob and offers advanced perpetual multi-channel inventory management features, such as automatic stocking, inventory reporting, and powerful analytics.
A perpetual inventory system is the best choice for fast-growing ecommerce businesses. A periodic inventory system has a high probability of discrepancy and weaker stock control. With a perpetual inventory system, you’re able to centralize inventory management, optimize stock levels, and much more.
ShipBob’s fulfillment technology comes with built-in inventory management tools, including demand forecasting, order management, and data and analytics. To learn more on how ShipBob can support your ecommerce business, click the button below to request information.
Perpetual Inventory System FAQs
Inventory tracking is an important part of your ecommerce business. It is key to having stock available for sale and ensures you keep COGS to a minimum. A perpetual inventory system is the most common method used by fast-growing ecommerce businesses.
1. What is a perpetual inventory system?
A perpetual inventory system is an inventory method that tracks changes in stock levels in real-time. It provides a detailed overview of inventory on hand and goods sold.
2. How does a perpetual inventory system work?
With the use of inventory management software, a perpetual inventory system tracks inventory levels and orders in real-time and centralizes the data in one place.
3. Why do companies use perpetual inventory systems?
A perpetual inventory system gives an ecommerce business an accurate view of stock levels at any time without the manual process required for a periodic inventory system. The automation that a perpetual inventory system provides frees up time and capital.
4. What is the advantage of a perpetual inventory system?
A perpetual inventory system is more accurate than the less advanced periodic inventory system. Having a more accurate count of inventory at all times prevents stockouts and overstock issues.