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The Definitive Guide to Perpetual Inventory System Management

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Looking to make a tangible contribution towards the success of your business?

Good inventory management is the ultimate way to do that.

Unfortunately, achieving this is not as straightforward as it seems. After all, what is good inventory management? The answer to this particular question is a complex one, and will vary from business to business. However, one thing’s for sure: a perpetual inventory management system is much better than a periodic inventory system, especially in today’s time and age. 

Confused and don’t really know what we are talking about? 

Well, don’t worry! This guide is meant to help you navigate the concept behind perpetual inventory management, and will answer all your questions. Just keep reading! 

Contents:

  • Understanding Inventory Management
  • What is Perpetual Inventory Management
  • Perpetual Inventory Management – Tips 
  • Perpetual Inventory Management System Software

Understanding Inventory Management

Although we are more concerned with perpetual inventory management in this guide, one cannot possibly talk about it without referring to what inventory management is at its very basic level. It is important to understand the typical feature of inventory management before we dive deeper into what a perpetual inventory management system is, and that is exactly what this section does. 

What is Inventory Management?

Inventory management, in the simplest of terms, refers to the way you handle your stock. It’s ultimately the foundation to other processes like manufacturing, order fulfilment, as well as customer satisfaction; as long as your inventory management is strong enough, the rest of these processes will also follow lead. 

If you look into it deeper, your inventory management essentially consists of methods that help you gauge how much stock you have, how much you need, and how much you are likely to sell. It enables you to make smart decisions about not only manufacturing and purchasing your stock, but also selling it. With a cohesive system of inventory management in place, you can identify important trends in your sales pattern and then use it to refine your surface. 

Inventory management is also an effective way to deal with stock shortages, overstocking, and shrinkage. Although your inventory becomes revenue once it is sold, it is an uncapitalized asset as long as it sits in your warehouse. This means that although you are spending money on it, you aren’t really getting anything back (at least for that time period). Needless to say, this complicates things a little in terms of budget, which makes it all the more pertinent to be smart about your spending. Luckily, that is exactly what inventory management helps you do! 

The Importance of Inventory Management

But why should you be bothered about inventory management to begin with? Well, for the most part, it is because your company’s health literally depends on it. If your company was a person, inventory management would be a fitness routine designed just for it’s specific needs; a routine that helps it work better in the long run and the importance of which cannot be understated. 

Remember, inventory management helps you control your stock and hence, saves your time, money, and effort; all at once. It can enable you to save yourself from considerable detriment, and hence is not something that can just be neglected in any way, shape, or form. 

Regardless of the size of your business, inventory management is an important process. If you are a big company, you need inventory management to streamline everything that is happening at your warehouse in order to avoid unbearable chaos. If you are a small company, you must establish a solid system of inventory management to outsmart your competitors and get ahead in the game.

Benefits of Inventory Management

All in all, inventory management can help you by: 

  • Cutting down labour costs
  • Improving cash flow
  • Boosting customer satisfaction and retention
  • Butter supplier and workforce relationships 
  • Faster and more efficient fulfilment processes
  • Higher quality control 
  • & more

Types of Inventory

Now that we have a good idea of what inventory management is, let’s have a look at the different types of inventory you may have to actively deal with as a business: that too simultaneously! Understanding how these types work can actually give you a pretty good idea of what kind of inventory management you should be focusing on for your business.

  • Raw Materials Inventory
  • Work-in-Progress Inventory
  • Finished Goods Inventory 
  • Decoupling Inventory
  • Safety Stock
  • Packing Materials 
  • Cycle INventory 
  • Service Inventory 
  • Transit Inventory 
  • Theoretical Inventory
  • Excess Inventory 
  • Maintenance Inventory 
  • Repair and Operations (MRO) Inventory

We deal with the types of inventory management in our guide to inventory management, so make sure you check it out here. 

Inventory Management – Important Techniques

Lastly, before we get to understanding what perpetual inventory management software is, we must take a look at some important inventory management techniques and terms. These shall give you an even better idea of how inventory management is integrated with your other business processes, and hence make it easier for you to grasp the need of a perpetual inventory management system for your business. 

Economic Order Quantity

This is a technique that encapsulates the ideal order quantity you need as a company. It will take into account certain variables, including but not limited to demand rate, total costs of products, etc. 

The ultimate goal of this technique is to minimise related costs by helping you considerably reduce your buying. 

Perpetual Inventory System Management-Economic Order Quantity

ABC Analysis

This is one of the most effective methods of inventory management. It involves inventory categorisation that helps you identify your most valuable products. ABC analysis involves splitting your inventory  into three sections: A (most valuable), B (“medium” value products), and C (least valuable). 

Needless to say, this kind of setup helps you sell and arrange your warehouse properly. The idea is to identify the products that will have the most heavy impact on the overall inventory costs, and then figure out your storage accordingly. Most businesses use the ABC analysis to make sure that they have only as many valuable items as they can sell, so that the cost of their inventory doesn’t unnecessarily increase. 

Just-in-Time Inventory Management

This is another inventory management technique that is focused on the idea of minimising cost, time, and effort. It revolves around arranging products only in accordance with the orders you receive. So, JIT involves getting raw material from suppliers only when the production schedule demands it – not before it, not after it. 

This way, businesses ensure that they don’t have extra stuff lying in the warehouse, and that they are producing only as much as they need. In turn, they can significantly cut down on inventory costs and avoid deadstock. Yet, JIT management involves a certain amount of risk, so it is better to be wary of all the advantages and disadvantages of this technique before you decide to dive into it! For more information, check out our guide on JIT inventory management.

Perpetual Inventory System Management-Just-in-Time Inventory Management-
Perpetual Inventory System Management-Safety Stock Management

Safety Stock Management

Safety stock management can be considered as the practice of ordering more stock than necessary. Although this adds an extra layer of management to the overall inventory management system, some businesses might find safety stock lying around in storage to be useful in the times of emergencies, spikes, and seasonal fluctuations. 

Many businesses who opt for having safety stock at hand are aggrieved by incorrect forecasting. They don’t want to risk a stockout, since it is a known fact that there is nothing that customers hate more than not having their favourite products available at hand. The good thing is that this can easily be avoided with the right perpetual inventory management system, but more of that later. 

FIFO and LIFO 

FIFO (First-In, First-Out) and LOFI (Last-In, First-Out) are two corresponding, yet different but equally popular inventory management methods. The former involves focusing on selling the older inventory first. This allows businesses to keep their stock fresh, and minimise problems with deliveries. 

LOFI, on the other hand, sells the newer inventory first. This is a great practice if your products have a short shelf-life since it ensures that your inventory doesn’t go bad! 

Although these are the main and the most popular types of inventory management methods. There are many others, including; reorder point formula, batch tracking, consignment inventory management, dropshipping, lean manufacturing, six sigma, lean six sigma, demand forecasting, cross-docking, bulk shipments, and of course, perpetual inventory management – which we are just about to get into. 

Perpetual Inventory System Management-FIFO and LIFO

Remember that although these techniques are quite distinct in nature, it is not unusual for businesses to use a couple of these together, simultaneously. In fact, a good inventory management system will often involve many of these at work in a mixed and matched sort of a way, which is probably for the best if you are looking for extra efficiency! 

As mentioned earlier, the right inventory management system and method you choose for your business largely depends on what the nature of your business is. However, perpetual inventory management is something that has become a part of most businesses, and for good reason. 

What is Perpetual Inventory Management?

This section is all about understanding what perpetual inventory management in particular is, so perhaps the best place to start with is a simple definition of this practice. 

Perpetual inventory management is an inventory management practice that simply involves counting inventory as soon as it arrives. Yes – that’s all, at least at a rudimentary level. It is one of the simplest, yet most significant inventory management techniques and can easily be executed by the use of a pen and paper, or a spreadsheet! However, you would most likely want to use a software for this and we will get into the “why of that” later in the guide. For now, the focus must remain on perpetual inventory management! 

Period Inventory System vs Perpetual Inventory System

Typically, there are two types of inventory management systems that businesses are likely to use. One of them is a periodic inventory management system, whereas the other one is a perpetual inventory management system. 

We can tell you right off the bat that a perpetual inventory management system is considerably better than a periodic inventory system. This is because implementing perpetual inventory processes in your workflow can really refine the entirety of your operations as a business. However, to properly draw a comparison between these two systems, let’s have a so that you can get a better idea of what we are talking about. 

Periodic Inventory Management System

A periodic inventory management is all about relying on your workforce to take audits of stock every now and then, and this is the main form of updating your stock as far as this system is concerned. It is heavily dependent on physical counting of the stock and requiring your workers to actively match data and see how it compares to the sales data themselves. 

As you can probably understand, this is extremely time-consuming. Not only that, it is also a little too reliant on human efforts, which is not ideal since it opens you up for considerably more discrepancies and mishaps. Especially if you are a bigger business, it is more or less impossible to deal with stock with 100% accuracy if you are using a periodic inventory management system. 

However, it’s not always bad for your business. If you are a small business and don’t deal with a large volume of products, a periodic system may be a much better fit than a perpetual inventory management system. 

Some notable advantages that a periodic inventory management system which involves regular physical inventory counts includes: 

  • No separate accounting needed for different types of inventory.
  • Less expensive inventory management processes. 
  • Applicable for business organisations of all sizes. 
  • Can be done at the end of a period instead of being done constantly. 
  • The quantity lagged is usually reliable.

However, it comes with some disadvantages as well. These are: 

  • Physical counting of stock may mean a suspension of business operations for a day or two. 
  • It is a time-consuming process. 
  • There is an increased chance of fraud and forgery. 
  • Any updates that the stock information might need cannot be made easily. 
  • Stock control is very weak.

Due to these disadvantages, many businesses avoid periodic inventory management system and focus on perpetual inventory management instead. Yet, an important point to remember is that even where perpetual inventory management is leveraged, it is not uncommon to have at least some physical counts during the year. This is a good practice as it allows you to stay in touch with your inventory in a considerably better way. 

Perpetual Inventory System

As we have discussed already, perpetual inventory management means that you track your stock every single day. This means that the products that are being sold are recorded on a daily basis, and you stay in control of the activity in real-time. In a perpetual inventory system the physical count of inventory is still important – but only once in a while. So, as opposed to the periodic inventory management system, the perpetual inventory system is an effort to automate your inventory management process as a whole and will as such allow you to record your inventory activity constantly. 

One difference between periodic and perpetual inventory management systems is that while the former is a slow and thorough process, the latter is a progressive, efficient approach and can be used to make your inventory management experience a lot speedier. 

So – perpetual inventory management seems to be a better option than period inventory management systems. However, you must keep in mind that perpetual inventory management also comes with its own set of disadvantages, just like the periodic inventory management system. 

For example, loss of items. With a perpetual inventory management system, since you are not consistently keeping a physical check on the stock, it can be easier to lose items.. So, incase any items get stolen or broken, it can take you quite a while to figure out the anomaly, which can put your calculations off by a lot. 

Not only that, perpetual inventory management systems also run the risk of scanning errors. This is because perpetual inventory management is either executed with the help of barcode scanning, or with the help of RFID technology. Although both of these processes are advanced and used by many businesses on a daily basis, there is also a possibility that there can be an error while scanning. This sort of a thing cannot be detected by a perpetual inventory management system – at least not quickly enough. 

And lastly, with a perpetual inventory management system, as with almost everything that makes use of the cloud and the internet, there is always the possibility of hacking. Unlike periodic inventory management, perpetual inventory management has to use software to streamline everything and grant you the control of your inventory activity. If you use a software that doesn’t have right safety protocols in place, it can easily be hacked and your information compromised. 

Do these setbacks mean you shouldn’t consider perpetual inventory management as the right tool for your business? Certainly not! In fact, you should view these setbacks as challenges. With easy planning, the right implementation of perpetual inventory management techniques, and an optimal inventory management solution, you can easily overcome these problems and turn  your inventory management system into the key to success for yourself.

How Does Perpetual Inventory System Work?

The perpetual inventory management system is all about updating your inventory costs continuously. So, it is focused on increasing the accuracy of the data you get, and making the rest of your fulfilment-related methods a lot more efficient. In order to be able to leverage a perpetual inventory management system properly, you must take into account how the whole thing actually works.

On the question of how the perpetual inventory management system works, it is actually a step-by-step procedure. Let’s have a look at it: 

Perpetual Inventory System Management-Inventory level updates by a POS system-

1. Inventory level updates by a POS system

The process starts off by updates of inventory levels. Whenever a product is sold, the POS (Point of Sales) system updates the inventory management system, which then calculates the debit and applies it to the stock across all available channels. This is not a complicated procedure, and can be easily executed by RFID technology or barcode scanners.  The more efficient your POS and inventory management software is, the better this process is likely to be executed.

2. Automatic updates of the cost of goods

The second step involves the automated updating of the total cost of goods. So, whenever a product is sold by your business, a perpetual inventory management system would enable you to recalculate your total cost of goods. The same goes for whenever you receive a good. As a whole, this step means that your total calculation is constantly up-to-date and you can make smart purchase decisions based on this. 

Perpetual Inventory System Management-Automatic updates of the cost of goods-
Perpetual Inventory System Management-Regular adjustment of reorder points

3. Regular adjustment of reorder points

In addition, a perpetual inventory management system will also involve regular updates and adjustments of reorder points in accordance with the increase or decrease of your sales. This makes perpetual inventory management an even more advanced procedure, as this means that your inventory levels are kept at the ideal levels throughout! 

4. Automatic generation of purchase orders in accordance with inventory activity 

A perpetual inventory management system will take into account your inventory activity before it automatically generates purchase orders. Whenever you are running low on a product, a perpetual inventory management system will automatically send out a purchase order, with no human intervention at all! 

Perpetual Inventory System Management-Scanning received products into inventory

5. Scanning received products into inventory

Once you get your products from your supplier, perpetual inventory management means that they will be scanned as soon as they come in. Of course, this will usually require the help of an employee – they will scan the product and it will then appear in your total inventory. The system can then take it into account. In a perpetual inventory management system the amount will be adjusted in accordance with each product that you factor in in your inventory. 

So, now that you have a better idea of how perpetual inventory management is executed at different points in your order fulfilment journey, do you realise the importance of it?

Advantages of Perpetual Inventory Software

Perhaps a deeper look into the advantages of a perpetual inventory management system will help. At this point, we know that perpetual inventory management is better than periodic inventory management because it is more efficient and allows you as a business to bring a much more consistent approach to the table when it comes to managing your inventory. 

However, the good thing is that there are many other benefits associated with perpetual inventory management, including but not limited to:

Access to real-time data

As a business operating in the 21st century, you may already appreciate the value of real-time data. Not only is it useful in terms of evolving your warehouse processes, but it is also important if you are looking to refine other aspects of your business. 

For this reason, and many more, it should be every business’s priority to focus on collecting data in real time. A perpetual inventory management system is great in this sense because it helps businesses by capturing inventory updates and movements as they happen. You get to keep an eye on your inventory activity at all given times and hence get access to fresh and accurate data every single day!

Develop a powerful paper trail

A paper trail is important; not just for security reasons, but also so you can understand your inventory management and warehouse operations in a much better light. Recording all the movements and interactions across your supply chain can be very helpful, and hence should be a core component of your inventory management routine. 

Thanks to a perpetual inventory management system, you can develop a comprehensive paper trail of everything that is happening within your warehouse in terms of inventory. Having an accessible record of everything means that you can also, very easily, identify the gaps in your inventory management system as a whole and optimise it accordingly. 

Reduced inventory management costs

Money is a huge factor for all businesses, regardless of their nature or size. All businesses want to save money, and a perpetual inventory management system helps you do so. 

You can use your inventory management system to minimise your holding costs and inventory replenishments, which also leads to a reduction in your total inventory management procedures. This sort of a system also ultimately automates a lot of processes that would otherwise be manual and use up labour costs, so it also helps you save on that end. 

More accurate forecasts

One thing you should avoid if you are aiming towards the success of your business is a shot in the dark. Without the right planning of your processes, the way you carry out all your processes may not align with the rest of your work, which may lead to detriment to your business as a whole. 

Therefore, forecasting becomes an important aspect of whatever you do. With a perpetual inventory management system, forecasting becomes more important. The right system will help you make forecasting demand a lot more simple because it will provide you with historical as well as up-to-date data. This in turn can be leveraged to predict sales cycles and patterns, and you can plan your inventory accordingly.

Easy calculation of end-of-year inventory balance

As we discussed the periodic inventory management section, end-of-year inventory counts can be tiresome if you are planning to carry them out manual. Many times, you have to close your shop and cease your operations for a day or so in order to do your counts and update your inventory management procedures. 

However, it doesn’t have to be this way. End-of-year inventory can be done instantly if you have a perpetual system in place. This is because this system has your data from throughout the year, and it will need only a few clicks to calculate the whole thing with the help of a perpetual inventory management system calculator! 

Prevent stockouts

A business owner’s worst nightmare? A stockout. A stockout is something that doesn’t only cause detriment to your sales straight away, it also may have a lasting negative impact on your rapport with the customer. 

Unless you invest in adequate inventory management measures, you cannot say goodbye to stockouts. For example, if you have a periodic inventory management system in place, it can become quite challenging to make sure that you are conducting physical checks regularly enough to know exactly how much stock you have onboard and how much you need. 

With a perpetual inventory management system, on the other hand, it becomes considerably easier to prevent stockouts and impress your customers continuously with whatever they want to purchase from you. 

Understand your customers better

The customer is always right. You may have heard this saying – and it’s true! As a business, the only way you can prolong your success is if you do a good job of understanding your customers. However, as easy as it sounds, it can become quite complicated. Especially if you have a diverse audience group, it can be quite difficult to understand what it is that your customers want. 

However, with the help of a perpetual inventory management system, you can easily study patterns and understand what exactly it is that your customers want. It can give you insights on things like what are your most popular products, what seasons are favourable for you in terms of sales, and what kind of discounts would work the best for you. It can also help you streamline the returns process, which is an important aspect for any businesses to focus on and can really help you accelerate the success of your business. 

If you plan your customer’s purchase journey from start to finish on the basis of perpetual inventory management, you can understand how to create an experience that resonates with them and retains them for a long period of time.  

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Is a Perpetual Inventory System the Right Fit for You?

In this section, we will look at whether or not a perpetual inventory management system is the right fit for you. As discussed earlier, some businesses may find that they will benefit more from a periodic inventory management system. These businesses are likely to be small in size, the inventory of which can be easily summed in a spreadsheet. 

However, if you’re a medium to large sized business dealing with a large range of products, you should undoubtedly use a perpetual inventory management system. Moreover, if you are a smaller business aiming to increase your scalability, even then perpetual inventory management becomes an important tool for you. 

The main reason behind this is that when you are dealing with a lot of products, it can be hard to complete cycle counts. With a periodic system, this is always the aspect of physical count involved in the discussion which means that you will have to depend on your employees to carry out the major chunk of the process. A large range of products means that it is more or less impossible for a human to do the counts with 0 error. So, a perpetual inventory management system seems to be a much better option. 

Secondly, if you operate in multiple locations, you might find that a perpetual inventory management system is a considerably better fit because of the fact that it provides you with a regularly updated database of products. That way, you can see which products are in stock near you. 

For example, you have warehouses in Area A, Area B, and Area C. Your customer wants an apple pie delivered to their house, and the stock for that is only available in your warehouse at Area C. A perpetual inventory management system will help you understand this right away, you can simply process the order for the apple pie from your warehouse in Area C. This saves not only time but also helps you provide a better service to your customer! 

To be fair, almost any business can benefit from a perpetual inventory management system. It deals with things that a periodic inventory management system cannot deal with – at least not efficiently. For example, a period inventory management would really complicate the whole return and refunds procedure, and you might not even be able to log everything in the record properly.

Therefore, our suggestion for all businesses that are looking to expand their operations and outsmart their competitors is to use a perpetual inventory management system. If you feel like you are always on the lookout for information that can help you understand and increase your profitability, a perpetual inventory system can help. 

And honestly, there isn’t really much that should hold you back from making this choice. Increasingly, inventory management systems, especially the ones focusing on perpetual inventory, are becoming more accessible and affordable. This means that you should be able to integrate one into your processes without causing a major dent to your budget or other financial restrictions. 

And needless to say, perpetual inventory management is the future. With the rise of dark warehouses and factories (i.e. fully automated premises(, it would be unwise to stick to old ways of doing things as it will only stop you from maximising the overall potential of your business. An inventory management system, especially a perpetual one, amalgamates all the important aspects of your supply chain i.e. manufacturing, warehousing, marketing, and customer relations into a one stop approach, which you can benefit from easily.

Perpetual Inventory Management - Tips

Just because everything is automated when it comes to perpetual inventory management doesn’t mean that there is no need for your own effort! In fact, it is very important for you to configure your software properly in order to be able to ensure that the system actually contributes to your success and brings value to the table in terms of inventory management. 

To this end, there are certain things that you do – let’s turn to those now. 

Perpetual Inventory System Formula

For starters, you should get into the habit of using the right formulas when it comes to perpetual inventory management. These formulas can help you make sense out of your inventory activity, and make decisions that turn out to be beneficial for your business as a whole. 

1. EOQ (Economic Order Quantity)

We discussed this in some detail in the inventory management section of this guide. This perpetual inventory system formula can help you understand the exact cost of storing goods in comparison to the actual cost of the goods. Reaching this particular calculation, you can easily know how much inventory you should buy, or what mistakes you should make to minimise expenses. 

The key components of the formula are

D: Annual Quantity Demanded

S: Ordering Cost (Fixed Cost)

H: Holding Cost (Variable Cost)

 

The formula is: EOQ = √2DS/H

Perpetual Inventory System Management-The Cost of Goods Sold (COGS)

2. The Cost of Goods Sold (COGS)

It is not unlikely for your expense account to increase and lead to a growth in sales if you sell your products in a perpetual inventory management system. The cost of sales is hence something that you need to keep in mind, since these are the expenses you incur from the production of your goods over a certain period in time. These costs include labour, material, and any other production costs that there might be. As such, your perpetual inventory system journal entry can be quite comprehensive in terms of your finances

The key components of the formula are: 

BI:  Beginning Inventory

P: Purchases for the period

EI: Ending Inventory

 

The formula is: COGS = BI + P – EI

The way COGS works is that you calculate the beginning inventory as whatever stock you have on hand from the previous sales cycle, or a true beginning inventory. Then, whilst the perpetual inventory management system is running, you go about your sales as usual, which will include making any purchases alongside. 

The COGS formula is then applied to get to the cost of sales, and can turn out to be helpful.

3. Gross Profit

Gross Profit is another perpetual inventory system formula that can be used in connection with an inventory management system. It can help you calculate the total revenue your company has generated, according to which you will be able to make other product decisions as well. 

The key components of the formula are

COGS value

Revenue

The formula is: Gross Profit: Revenue – COGS

These three are an important perpetual inventory system formula individually and also can be leveraged collectively. When paired with perpetual inventory management, they can lead to some great insights. The best part is that most of the time, you wouldn’t even have to actively put these formulas into your system. If you choose a good software, chances are it will generate reports itself and you can get your hands on such information yourself. 

Perpetual Inventory System Management-Gross Profit-

Methods in Perpetual Inventory Management

1. FIFO Perpetual Inventory Management under the Perpetual Inventory System

Again, we discussed FIFO in the main methods of inventory management. Yet, it can be leveraged properly only if you use a perpetual inventory management method. Essentially, this method is a cost flow assumption that involves you prioritising your stock based on when it comes. Basically, items that are put in the inventory first are the ones to also be sold first. This means after the sales cycle is over, the inventory left is the inventory that was most recently purchased!

Since a perpetual inventory management system changes with every transaction, it is easier to calculate costs in accordance with the FIFO method. By using the FIFO section on your software, you will be able to calculate the ending inventory, and can update your accounts in relation to that. 

In case you are looking for an investor in your business operations, integrating the FIFO method in your perpetual inventory management system is a good option since it shows the largest possible profit on your financial statements. It shows a lower expense on the COGS end, and on the other hand, shows higher net income which can be attractive for a potential investor. 

2. LOFI Perpetual Inventory Management under the Perpetual Inventory System

This is also a cost flow assumption, and is similar to the FIFO method. However, instead of the items first placed, this method is focused on processing sales for the items placed last in the inventory. This would make the items left the oldest purchased or produced. 

In a perpetual inventory management system, the last costs that you end up with during the sales are the first that the software registers as debit in the COGS account. It is best used during a period of inflation, because it shows a higher COGS expense as compared to the net income. Since businesses get taxed on profit, if you use the LOFI method on your financial account statements, there is a chance that you will be subject to lower tax liability. 

3. Weighted Average Cost Under the Perpetual Inventory System

Just like the two aforementioned methods, this method is also a cost flow assumption model and can be used for businesses to add value to their inventory. As a whole WAC is the average cost of goods sold in total, through the inventory. This method is differently performed in the perpetual inventory management system, and will not be the same as using it in a periodic inventory management system. 

The ultimate goal of WAC is to give your inventory a standard average time every time it is updated with a purchase or a sale.

Best Practices for Using a Perpetual Inventory Management System

We have already established that a perpetual inventory management system can be used for achieving a higher ROI. However, it is not as simple as getting a perpetual inventory system, setting it up, and calling it a day. After all, it isn’t a magic wand (although it is a close second)

The trick is to implement as many proven best practices in your processes while using your perpetual inventory system as you can. If you develop the habit of incorporating set principles into your inventory management work, you will see that you will be opening yourself to many great benefits.

Perpetual Inventory System Management-Categorize your inventory

1. Categorise your inventory

Your inventory is the one aspect of your business that needs top-notch organisation – a lack of this can lead to unbelievable amounts of chaos. An important part of the overall organisation of your inventory is correct labelling and categorisation. 

Ideally, your capital investments should be categorised according to value. For example, products that are likely to generate a higher ROI should be labelled as such, whereas your best-selling stock that is likely to get sold out fast should be labelled as such

On the whole, you should be aiming to categorise your stock as bestselling, medium value, or low priority. This can also help you with the aforementioned ABC method, and is a great way to make sure that your stock handling is optimised to the max. 

2. Refine placement processes for the warehouse

Not all businesses realise this but inventory management can become as easy as a breeze if the physical setup of your stock is well-planned. Even with a perpetual inventory management system, it is important to establish a proper structure to your warehouse product placement. 

So, essentially, you should focus on creating user-friendly access to your stock in the warehouse. This will help you speed up your fulfilment processes to a great extent, and of course; the faster your order goes out, the faster more can come in!

Another crucial aspect of effective warehouse and inventory management is decluttering. Whether it is your storage area or the packing station, you should aim for a completely clutter-free environment in your warehouse so it is easier to navigate the layout as well as execute accurate order delivery. Gladly, companies using a perpetual inventory system can do this easily.

Perpetual Inventory System Management-Refine placement processes for warehouse
Perpetual Inventory System Management-Set elaborate key metric

3. Set elaborate key metrics

Think of key metrics as the blueprint of your success. As long as you keep in mind these key performance indicators, it will be easier for you to get to your goals as a business. The best thing about having key metrics and KPIs in your sight at all times is that when used correctly, they can reflect a thorough assessment of your strengths and weaknesses. Identifying these can enable you to focus exactly on what needs improvement, and can hence make sure that your efforts aren’t going to waste.

Some important metrics that you can keep a track of include: 

  • Costs of carrying
  • Write down 
  • Write off
  • Turnover rate
  • Duration of each cycle
  • Tracking the status of procurement

4. Figure out your reorder point formula

For many businesses, the biggest challenge with inventory management is maintaining a balance between overstock and understock. If you get more products than you can sell, you are unnecessarily increasing your storage costs. However, if you get less products than you are putting your relationship with the client in danger and opening yourself to potential losses. 

Tracking your inventory activity and usage with a perpetual inventory management system will allow you to figure out a specific time frame for reordering. For example, you might want to set a minimum limit, after reaching which you will reorder stock. This can only be done if you track your sales properly, but luckily a perpetual inventory management system will help you with that.

Perpetual Inventory Management-Experiment with old stock

5. Experiment with old stock

This one’s definitely not something you will find in most guides on perpetual inventory management best practices out there, but it is a good one. When you think of increasing your earning as a business, you are mostly likely to think of boosting up the number of sales. However, that is not the only way to amplify your income as a business. 

Your obsolete stock, depending on how you deal with it, can bring you in some amazing sales. You need to take into account ways you can get that stock off your hands – whether it is changing the price here and there or including it in special bundles, you can actually make quite a few precious pennies if you are smart about it. 

The good thing, again, is that you can use a perpetual inventory management system to execute this quite easily. With the help of this, you can accurately forecast customer demand, tap into product insights for bestselling products, and then use them as a guide to improve your turnover rate in connection to. Companies using a perpetual inventory management system really benefit from this aspect, and so should you!

Perpetual Inventory System Software

So, at this point, we know that a) perpetual inventory management is the need of time and b) it can be made even more advantageous if implemented properly. THe answer to your question “Should I use perpetual or periodic inventory system?” has also been answered. But here’s the thing; unless you manage to find a top-notch, effective software solution, perpetual inventory management can only stay a distant dream for your business. 

Therefore, perhaps the most crucial part of perpetual inventory management is that you have to choose the right system – the one that actually helps you make a tangible change to your warehouse and fulfilment procedures. 

For this, we have prepared the following two sections. A read through these will help you figure out what exactly it is that you should look for in your inventory management software. 

Perpetual Inventory Software Features

First, we’ll take a look at all the features your system of choice should have. 

RFID tracking

The first thing to check off your list is RFID tracking. If your software doesn;t support RFID tracking, it simply isn’t good enough. RFID is the future, and all businesses that leverage this technology have witnessed tangible improvements in their operations. 

Every warehouse, to some extent, is equipped with QR codes and barcodes. To make sure that you can make yours even more advanced than usual warehouses, you need to use RFID alongside other tagging techniques. 

Get a software solution for perpetual inventory management that allows you to implement RFID tracking and scanning for specific tasks. This will help you deal with a bulk of products at once, and can also help you refine the safety aspect of your warehouse. 

Regular updates

The whole point of perpetual inventory management is that you can stay in touch with your inventory throughout the fulfilment journey. As such, your software of choice should offer 360 degrees of visibility. The more visibility it offers, the better you can make your processes. 

Regular updates will also make navigating your warehouse easier. You’ll know exactly where each product is being moved, which will make it easier for you to access it whenever you want. 

Audits to minimise discrepancies

Again, one of the biggest reasons behind choosing perpetual inventory management is that it equips you with the ability to stay in touch with your stock all the time. This also ultimately means that you can eliminate discrepancies from your record all together. 

You should go for a software that represents an up-to-date, accurate outlook of your inventory at all times. This means that the need for physical checks is decreased, and it is easier for you to make decisions about your inventory based on a precise account of the inventory activity. Hence, this is one of the most important features of inventory management and should be there in your system as well. 

Comprehensive document history

You never know when you will need to tap into your inventory history, so it’s best to go for a software that can help you do that. A feature that saves all your inventory and makes sure your data is accessible in the future is a good addition. 

This feature can ultimately not only help you create a comprehensive report out of your activity over the years, but also compare trends from different sales cycles to see where you have improved and where you are lacking. 

Safety protocols

Although a cloud-based solution is the only one you should be interested in for multiple reasons, such a software is always at the risk of being hacked, and unfortunately, when something like this happens, there is not much that you can do. 

However, by choosing a software that has the right safety protocols in place, you can make it easier for yourself to pick a solution that doesn’t put you or your data at risk. A good perpetual inventory management system will let you configure safety settings and also control all your data by yourself, so that you are constantly assured that everything is on track. 

How to Choose the Right Perpetual Inventory Management Software

In addition to the features mentioned above, there are a few other things you should ask yourself before you choose your inventory management system, especially a perpetual inventory management system.

1. What type of a business are you? 

Are you a small startup or an enterprise-level corporation – or are you somewhere in between? Are you a retailer or an eCommerce vendor? What’s your target audience? The answers to these questions define you as a business and can help you get to the right perpetual inventory system. 

For example, a large manufacturing business would have considerably more complex inventory than a startup eCommerce venture’s inventory. It is according to your specific needs that you should decide which inventory management system to go for. 

2. What are your goals?

The next important question has everything to do with your goals. In this regard, you need to list down all the challenges you face as a company, as well as all the objectives you would like to meet with your operations. This will give you a pretty good idea of what exactly it is that you are looking to achieve with your inventory management. 

For example, your goals could have to do with increasing customer satisfaction. For inventory management, it would mean that you have to focus on increasing your delivery times and exercising better quality control. 

3. Are you willing to train your employees?

Although a perpetual inventory management system is meant to grant you full control of your inventory management solutions, it is unwise to not get any help from your staff when it comes toi inventory management. I mean, it’s pretty obvious that good inventory management is not a one person’s job, and there needs to be effort from the whole team. 

The question that you must ask yourself, however, is whether your team can deal with extensive training or not. If you find that this would not be possible considering the amount of responsibilities they already have, you would want to go for an inventory management system that is too technical to understand, and comes with relevant, easy-to-read user guides that can help you navigate the software better. 

4. What’s your budget?

For most businesses, this will be the ultimate deciding factor on whether or not an app is the best fit for you. There are many perpetual inventory systems in the market, and you are likely to find more than one option for something that perfectly aligns with what you are looking for – yet, you need to keep your budget in check. 

Of course, you can’t go beyond a certain amount for inventory management. However, it is good to remember that a perpetual inventory system is essentially an investment, and if you have to pay a little extra for some important features, you should definitely consider it because trust us; it will prove worthwhile in the long run! 

Canary7: The Best Perpetual Inventory Management Software

Now that you are here, why don’t you try Canary7? It is equipped with all the important features we have discussed in this guide, and will streamline your inventory management processes like never before. All in all Canary7 is a perpetual inventory system example that will help you not only increase sales, but also boost customer satisfaction.

But hey, don’t take our word for it! Instead, book a free demo and see what we are talking about.