What are the types of inventory management system?

Choosing a method by which you will manage all of the widgets and other pieces and parts in your inventory is a very important decision that every small to midsize business owner has to make. And it will determine a lot about how your business operates. Whatever type of inventory management you choose, it is important to have the facts about it and then use it as consistently as possible from that point on. So let’s give you the facts on the two main types of inventory management: Perpetual and Periodic.

PERPETUAL VS. PERIODIC METHODS

What is the importance of inventory management? Without accurate knowledge of your inventory level, several vital business decisions would be difficult, if not impossible, to make—decisions like setting competitive selling prices, scheduling raw material purchases and scheduling production to replace the inventory item that was sold.

Two common methods of managing inventory are Periodic and Perpetual. Choosing which one to use is vital to the success of your business. The main difference between the two inventory control systems is how often inventory data is updated.

THE PERIODIC METHOD

The periodic inventory method is one in which inventory data is updated after a specific interval of time, usually a year. This is where the term periodic comes from. Data is entered into the inventory control system after a specific period of time.

The periodic inventory system is most useful for a small business that maintains minimal amounts of goods inventory. For them, a physical inventory count is easy to complete, and they can estimate reasonably accurate cost-of-goods-sold figures for interim periods. However, there are also several problems with this inventory control system:

• It does not yield any information about the cost of goods sold or ending inventory balances during interim periods when there has been no physical inventory count.
• You must estimate the cost of goods sold during interim periods, which will likely result in a significant adjustment to the actual cost of goods sold when you eventually complete a physical inventory count.
• There is no way to adjust for obsolete inventory or scrap losses during interim periods, so there tends to be a significant (and expensive) adjustment for these issues when a physical inventory count is eventually completed.

This inventory management system appeals to many businesspeople because they don’t have to spend as much money up front to set up the inventory hardware and software needed to keep track of data, like they do in a perpetual inventory system.

THE PERPETUAL METHOD

Under the perpetual inventory method, a business continually updates its inventory records. A perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced physical inventory level. Plus, it saves the company time and money by lowering inventory cost, optimizing inventory tracking, and reducing manpower needed to run the business.

One deciding factor for choosing a perpetual method is the level of technology available. If the company has the ability to record transactions in real time using the following tools for accurate inventory forecasting, then the perpetual system may be the better option:

• Point-of-sale scanning equipment and software
• Barcoding
• Mobile warehouse solution
• Inventory management software

Fishbowl is one of the best tools for managing your inventory or stock level, especially if you prefer the perpetual inventory method.

TL;DR SUMMARY

There are two main types of inventory management:

• Periodic Method – Inventory records get updated manually on a scheduled basis.
• Perpetual Method – Inventory records get updated in real time via barcode scanning and other automated means.

• Watch the next video: How The Unleashed Inventory Management System Works
• See the software in action: Unleashed Webinars

Each company will manage stock in their own unique way, depending on the nature and size of their business. Let’s take a look at a simple example.

Inventory management system example

Carlos starts a business selling food hampers. He has various suppliers who sell him food in bulk, some of which must then be split up and repackaged.

Carlos creates an Excel spreadsheet, which he updates whenever he orders more stock, assembles a hamper or completes a sale. This is his inventory management system, and he’s entirely dependent on it to know how much stock he currently has, when his food products might expire, how many hampers he can sell and more.

Why you need an inventory system

Any venture that handles stock will need a system to accurately track and control it. Without one, you’ll be working on an entirely ad-hoc basis — and you’ll quickly run into situations where your business is overstocked or understocked.

Inventory systems tell you the number of components or ingredients you need to create or assemble your final product. Without this information you may end up with excess stock, eroding your bottom line, or with insufficient stock to meet customer demand.

But while you will need an inventory management system, which one you choose is entirely up to you. There are countless different systems you can adopt, ranging from simple approaches to comprehensive solutions.

Periodic vs perpetual inventory systems

There are two main ways in which companies manage inventory: periodic systems and perpetual systems. Let’s take a look at the difference between the two.

Types of perpetual inventory management system

Using spreadsheets to manage inventory

Plenty of businesses follow Carlos’ example and start off using Excel: it can be a great way of managing inventory on a basic scale. However, this does come with a few downsides. Human errors, for instance, can easily snowball into costly problems when using spreadsheets. Plus, flexibility and accuracy can often be hard to come by.

Pros: Spreadsheets are low cost, fairly easy to set up, and work fine for companies with simple needs.

Cons: If the spreadsheet breaks, so does your inventory management system. And as your business gets more complex, it’ll quickly become unwieldy.

Basic inventory management software

Many cloud-based apps come with basic inventory management functionality. While not the comprehensive tool that you’ll get with dedicated software, for many it’s the natural next step from spreadsheets. You may find that you still need spreadsheets to cater to your specific requirements, though.

Pros: No need to find and install a new solution, most applications are cloud based

Cons: Often difficult to match to your specific needs

Dedicated inventory management software

Dedicated inventory management software is developed specifically to help you track and control stock. If the software is cloud based, you’ll be able to sync it up with your other cloud applications (Unleashed, for example, integrates with Xero, QuickBooks, Amazon, Shopify, Vend and hundreds of other apps), and access your data anywhere, at any time.

Pros: A powerful solution that’s easy to integrate into other systems. Fully flexible, and designed specifically for the task.

Cons: Requires proper setup to function to its full potential

Enterprise resource planning systems

With enterprise resource planning (ERP), you buy a single solution to cover every aspect of business planning — instead of multiple different cloud components that integrate with each other. This typically involves choosing and installing the ‘modules’ that you need, including inventory management.

Pros: Get a single system that might cover inventory, accounting, supply chain, HR and more.

Cons: Expensive (with ongoing costs for maintenance and upgrades), requires considerable time and manpower to implement, tailored software might well do each task better

Warehouse management systems

Warehouse management systems can be hugely beneficial to your inventory control, but they shouldn’t be confused with inventory management systems. Warehouse management is all about empowering your warehouse team to operate as efficiently as possible — while many inventory systems may have some functionality to assist with this, it won’t be as comprehensive as a dedicated warehousing tool.

Find out more about warehousing systems.

When to upgrade your inventory management

Moving onto a dedicated inventory solution can provide massive benefits to your business, but it is a step change. Here are some signs that it might be time to upgrade.

You need more flexibility

Spreadsheets are an inflexible way to manage inventory. If you find that you need to add extra sheets to your solution, or are struggling because employees can’t access real-time data, then it might be time to upgrade to cloud-based inventory software.

You need more accuracy

Do you find it difficult to track how much of a particular item you have at any one time? Using a dedicated solution, you — and your employees — will be able to get up-to-date information on your inventory at any time, from any place.

Inventory costs are growing

Holding costs can severely undermine your bottom line when they are not kept under control. The key to minimising holding costs is only to store as much stock as you need. An efficient inventory management system helps you keep your storage efficient.

Slowing growth

Maybe your salespeople have to contact your stockroom to get find out what they have to sell, or you find yourself spending too much time manually writing reports rather than focusing on your customers. Slowing sales can be a symptom of poorly managed stock — dedicated software can help you quickly return to growth.

Find out more about upgrading to inventory management software, or take the next step by learning why accurate inventory control is vital to your business.

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