Perpetual inventory is a system of inventory monitoring in real time where the sale of a product is immediately updated to the quantity record of inventory on hand.
Also known as continuous inventory, this is made possible by linking the point-of-sales system with the inventory tracking system.
When stocks are delivered to the warehouse, the inventory level rises. And when sales are made at the retail store, the quantity of the products on book inventory is updated accordingly.
This is seen by business people as the ideal method of tracking inventory levels so that business decisions can be made with real time information.
Decades ago, businesses practice non-continuous or periodic inventory systems where inventory on hand are updated on a periodic basis.
This is partly due to the lack of technology to efficiently implement perpetual inventory systems.
But the technology is available in modern times, and in fact, widespread.
This makes it possible for retail shops to prevent overselling products that are out of stock or underselling when there is in fact a lot of stock on hand.
A physical retailers would also be able to sell products that are not present in the store, and advise patrons to come back at a later date to collect the item.
Perpetual inventory management is a key feature of successful ecommerce retailers.
The ability to track real inventory numbers allow an online store to sell and even pre-sell products without having to worry about selling products to customers that are actually out of stock.
Being able to track these numbers in real time with this immediate-reporting ability can also be a factor that induces urgency on consumers to purchase quickly before a product is sold out.
For example, a traders imports 500 units of a back pack and list it online for visitors to purchase. As the stock numbers decrease, people who have it on their wish list can be nervous of missing out on the purchase of stockout occurs. This can induce them to purchase immediately when they initially intended to wait till a sales event occurs.
From a business perspective, perpetual recording of inventory enables decision makers to make more timely decisions of whether to order more or less of a particular SKU.
This can be even more useful when economic order quantity (EOQ) is applied.
Determination of sell-through rate can also be more accurate.
Main problem with perpetual inventory
The biggest problem is that the accuracy of such systems does not use physical counts to account for inventory.
Inventory added and removed from the system is mostly digital, except for when they are initially added into the inventory count.
This means that a pure computerised perpetual recording protocol does not check whether the numbers on record are the same as the real numbers in the physical warehouse where the goods are stored.
It does not account for shrinkage which is a problem that any retailers face.
Shrinkage can happen in various ways such as defective goods, theft, lost, etc.
The implication is that the system might show a particular number, but the actual physical count does not tally with the digital count.
So it is definitely possible for a customer to purchase a product and the seller finds out that the product cannot be delivered.
This can result in a bad service experience that can do damage to the brand image. It can also cause chaos in accounting.
With this in mind, retailers often use a combination of perpetual and periodic inventory tracking to ensure that the numbers add up.
For example, a computerised real-time inventory monitoring system is installed and implemented, and a periodic stock take is conduct quarterly to reconcile any variances between the two.
