Author: Jill Hillen Apr 13, 2024 4 Min READ

Perpetual Inventory Systems Explained

4 Min READ
Perpetual Inventory Systems Explained

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What Is a Perpetual Inventory System? Definition & How to Get Started

In the realm of third-party logistics (3PL) and ecommerce, managing inventory effectively is the cornerstone of success. How can you deliver on consumer expectations—and make a profit—if you don’t have accurate inventory reporting to know not only what you have at any given time as well as what it’s worth, in other words the inventory valuation?

Knowing your beginning inventory is easy enough (for any particular sku, the starting quantity you source to sell), and of course you hope your ending inventory when retiring a product from your catalog is zero (meaning no leftover items taking up valuable storage space), but what about the period in between? Keeping track of sold items across all sales channels, restocks, returns, lost goods or breakage, and quantities stored at different locations for each and every inventory item under your ownership is practically impossible (and incredibly time-consuming) without the right software.

Manage your inventory with Extensiv

For real-time updates on your overall inventory information, a perpetual inventory system stands out as a vital tool for mitigating discrepancies in your record-keeping, monitoring inventory movements, streamlining your accounting methods, demand forecasting, and more.

Let's delve into what a perpetual inventory system is, how it works, and inventory management tips for how businesses can implement this technology effectively.

What Is a Perpetual Inventory System?

A perpetual inventory system is a tool that facilitates advanced inventory management—with the flexibility to accommodate various inventory storage and cost methods like first in, first out (FIFO)—that continuously tracks inventory levels and transactions in real-time. Unlike periodic inventory systems, which update inventory counts at specific intervals, perpetual systems provide a constant, up-to-date view of inventory, including sales, purchases, and adjustments.

This system relies on technology, integrating barcode scanners, RFID technology, and automation in cloud-based inventory management software to track inventory as it moves through all the stages of the supply chain.

How Do Perpetual Inventory Systems Work?

At its core, a perpetual inventory system dynamically updates inventory records, offering a comprehensive view of stock levels, sales, returns, and more. When an item is sold, purchased, or returned, the system instantly updates by recording inventory changes in the master ledger of the software that is integrated with any and all relevant order sources (e.g., point-of-sale systems or online shopping carts and marketplaces) and destinations (e.g., warehouse and order management systems as well as shipping solutions).

This immediate feedback allows businesses—even small businesses that may feel they do not manage a large enough amount of inventory to need or benefit from specialized software—to make better-informed decisions, avoid stockouts, improve customer satisfaction, optimize their inventory control, and attain greater transparency over their financials (including easy-to-calculate inventory costs and economic order quantities).

This differs from periodic systems that only update inventory levels at specific intervals, typically inflexible accounting periods, and may require more frequent physical inventory counts to maintain accuracy.

Benefits of Implementing a Perpetual Inventory System

Real-time Inventory Tracking: Businesses gain a real-time view of their inventory, enabling them to respond swiftly to market dynamics and minimize the risk of overstocking or stockouts.

Increased Accuracy: By automating inventory tracking, the perpetual inventory method reduces human errors, ensuring more accurate and reliable inventory records.

Efficient Order Fulfillment: Real-time data enables quicker and more accurate order processing, enhancing customer satisfaction and loyalty.

Better Financial Reporting: With continuous updates, financial records are more accurate, aiding in better financial planning and analysis. Using a perpetual inventory system allows you to track your cost of good sold (COGS) in real-time rather than waiting for a specific inventory update or accounting period.

Enhanced Decision Making: Access to real-time inventory data empowers businesses to make strategic decisions, optimize stock levels, and improve overall operational efficiency.

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How to Implement a Perpetual Inventory System

Step 1: Evaluate Your Current Inventory Management Processes

Before transitioning to a perpetual inventory system, it's crucial to assess your current inventory management technique and practices. Understand your existing workflows, pinpoint bottlenecks, and identify the areas that require improvement. This evaluation will highlight the specific needs your new system must address, providing a clear roadmap for implementation.

Questions to Consider:

  • How accurate is your current inventory accounting and tracking
  • What are the challenges in your current system?
  • Are there any recurrent issues with stockouts or overstocking?

Step 2: Assess Your Readiness for a Perpetual Inventory System

Transitioning to a perpetual system for inventory management requires readiness in terms of technology, staff, and processes. Assess whether your warehouse infrastructure supports real-time data collection and whether your team is prepared for a shift to more technology-driven processes.

Readiness Assessment:

  • Do you have the necessary hardware (e.g., barcode scanners, RFID, or point-of-sale (POS) systems)?
  • Is your team trained in or ready to adapt to new technology?
  • Are you currently utilizing a warehouse management system (WMS), order management system (OMS), or inventory management system?
  • Do you have IT support for system integration and maintenance

Step 3: Select the Right Inventory Management Software

Choosing the right software is crucial. Select a system that offers robust features tailored for perpetual inventory management and scalability.

Factors to Consider:

  • Does the software integrate well with your existing systems?
  • Can it scale with your business growth?
  • Does it offer real-time tracking and data analytics?
  • How does it support decision-making and forecasting?

Step 4: Implement the Perpetual Inventory System

With the right tools in hand, begin implementing your perpetual inventory system. This involves setting up the hardware, installing the software, and integrating it with your existing systems.

Implementation Steps:

  • Install and configure hardware devices across your warehouse.
  • Deploy software and integrate it with your existing systems.
  • Migrate data to the new system, ensuring accuracy and consistency.

Step 5: Train Your Team

Training is critical to ensure your team is proficient with the new system. Look for a software partner who will provide comprehensive training sessions, focusing on the usage of new hardware, software functionalities, and best practices for inventory management.

Training Focus Areas:

  • Operating new hardware and scanning devices.
  • Utilizing software for daily inventory management tasks.
  • Analyzing inventory data and generating reports for decision-making and forecasting.

Step 6: Monitor and Optimize

After implementation, continuously monitor the system's performance. Gather feedback from your team, identify any issues, and make necessary adjustments. Use available analytics and reporting features to optimize inventory levels, forecast demand, and plan for replenishment. Set and monitor reorder points.

Optimization Strategies:

  • Analyze inventory turnover rates and adjust stocking levels.
  • Use data insights to improve order fulfillment accuracy and speed.
  • Regularly review system performance and user feedback for continuous improvement.

Improve Your Inventory Management with Extensiv

Extensiv offers exemplary functionality within our WMS built uniquely for third-party logistics warehouses, 3PL Warehouse Manager, as well as in our solutions for brands, including order and warehouse management tools.

Each of our solutions provides analytics and reporting features to maintain accurate inventory levels, forecast demand, and plan for replenishment. By leveraging Extensiv’s robust platform, ecommerce businesses and 3PLs can optimize inventory, reduce holding costs, and avoid stockouts and overstocks.

Interested in learning more about how to uplevel your inventory management? Subscribe to our blog above, or request a demo when you are ready to take the next step!

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Perpetual Inventory Systems FAQs

What types of business benefit most from a perpetual inventory system?

Warehouses and ecommerce businesses with high-volume sales and those that require real-time visibility and inventory tracking are the best candidates for perpetual inventory systems. Perpetual inventory methods minimize stockouts and overstocks and continuously record sales, returns, and discounts.

How do perpetual inventory systems differ from periodic inventory systems?

Perpetual inventory systems provide continuous inventory balances and updates to COGS as products are sold, returned, and discounted. Periodic inventory systems only provide updates to inventory and COGS only at scheduled times.

What are some best practices for maintaining a perpetual inventory system?

The best practices for utilizing a perpetual inventory system include understanding your inventory and cost flow (LIFO, FIFO, etc.), utilizing appropriate hardware (barcode scanning, RFID, purchase orders, etc.), establishing key metrics, and determining and monitoring reorder points.

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