What is a perpetual inventory system?

Perpetual inventory system

Managing inventories correctly is a big part of running an eCommerce business. You need to strike a balance between making sure there’s enough stock to sell, while not being burdened by storage costs you don’t need. Inventory systems are key in helping businesses understand where stock is located, what’s selling, and what isn’t.

A perpetual inventory system is a type of inventory system that allows businesses to keep track of inventories in real-time. It’s a popular accounting method for modern eCommerce businesses as it cuts down time spent on tracking inventory, and eliminates room for human error. Today, we’ll take a look at what a perpetual inventory system looks like, and the advantages a perpetual inventory system can have on your business.

What is a perpetual inventory system?

A perpetual inventory system records the purchase or sale of inventory in real-time through an electronic point-of-sale. It’s an automated process where changes are recorded on the system as soon as they occur, removing the need for annual manual recording from the user.

A perpetual inventory system can calculate up-to-date inventory without the need for a physical inventory count, allowing businesses to make quicker, more accurate decisions on how much stock is required at a specific time or place.

How perpetual inventory systems work 

Perpetual inventory systems use real-time automation software to track inventory as it enters the warehouse, up until point-of-sale. It is supported by barcodes and electric point-of-sale communications that work together to provide accurate inventory data. Users can check inventory movements through the fulfilment process, and use the insights provided to better manage their stock.

There are several stages to this process:

  1. Change of inventory: When an item is sold, a record of the transaction is sent to the inventory management system. Barcodes or RFIDs (radio frequency identification devices) make this super quick and super simple.
  2. COGS automatically updated: Immediately after the change of inventory takes place, the cost of goods sold (COGS) will be automatically recalculated.
  3. Reorder points adjusted: The system uses historical data to automatically update reorder points; the point at which stock should be replenished.
  4. Automatic purchase order: When an item reaches the reorder point, the system will automatically generate a PO to keep stock at the optimal level.
  5. New inventory is scanned in: When these new items arrive at the warehouse, they’ll be scanned and added back into the inventory database, ready to be bought.

An example of a perpetual inventory system in action

Now that we’ve gone over what a perpetual inventory system is and why it’s important for ecommerce businesses, let’s take a look at how you can use one in practice.

In this example, we will be using the Shopify platform to track our inventory levels.

First, we need to create a product in Shopify. We’ll name this product “T-Shirts” and set the price at $15 each.

Next, we need to create a variant of this product called “Black T-Shirts.” This variant will have the same price and quantity as the original product.

We then need to add both products to our shop. For the original product (T-Shirts), we will set the inventory quantity to 20. For the variant product (Black T-Shirts), we will set the inventory quantity to 0. Now, our shop is ready to go!

Free guide

Plan for peak 2022

Peak 2022 is coming around fast! eCommerce retailers typically need to start preparing 2-3 months in advance to ensure a successful peak season. In our latest guide, we cover what you need to do to get ready for Peak.

Download

We can now start tracking our inventory levels for both products. To do this, we need to create a Shopify App called “Perpetual Inventory.” This app will allow us to track our inventory levels automatically.

Once the app is created, we need to add it to our shop and connect it with our Shopify account.

The next step is to configure the app settings. We need to tell the app how many of each product are in stock and what the reorder point should be. In this example, we will set the reorder point for T-Shirts to 25 and the reorder point for Black T-Shirts to 0.

The final step is to add the app to our shop menu. We can do this by creating a new page called “Inventory.” This page will contain a link to our perpetual inventory system. Now, every time we make a sale, the app will automatically update our inventory levels and let us know when we need to order more stock.

Advantages of a perpetual inventory system

Data is collected and stored in real time

A perpetual inventory system keeps track of inventory changes and movements as they occur. This means you can rely on your inventory counts at all times, and inventory records stay up to date.

Provides a comprehensive paper trail

A perpetual inventory system keeps track of changes in stock and interactions throughout your ecommerce supply chain. This data will help you better understand the bottlenecks in your processes, allowing you to make improvements.

Inventory management costs are reduced

With real-time updates, inventory holding and replenishment expenses are reduced. Because perpetual inventory systems automate many operations that would otherwise need to be completed manually (such as physical inventory counts), it may help to save money on inventory cost labour costs.

Calculates the inventory balance at the end of the year

Because a continuous inventory system keeps track of all items from beginning to end, your year-end inventory balance is calculated immediately after the year ends. This allows you to confirm that your accounting numbers are accurate.

Can be used as a forecasting tool

A real-time inventory system makes forecasting consumer demand a breeze. You may utilise historical inventory and sales data to forecast future sales cycles and ensure that you have the ideal amount of goods available at various times throughout the year, such as during the holidays.

How does a perpetual inventory system differ from a periodic system?

A periodic inventory system is a system where you only track your inventory levels periodically, such as once a month. This can be more difficult because it can be hard to keep track of your inventory levels if they fluctuate often, and having to frequently count inventory takes a lot of time. Additionally, if something happens and you need to reorder stock, periodic inventory systems may not provide accurate idea of how stock much you need.

A perpetual inventory system is more beneficial for eCommerce businesses because it allows them to keep track of their inventory levels at all times. This way, businesses can make sure that they always have the products that their customers want and avoid overordering or under ordering products. Furthermore, managing inventory is quicker as a result.

James and James Fulfilment

James and James are a fulfilment service provider that specialise in helping eCommerce businesses scale up globally.

At James and James, every one of our clients has access to a perpetual inventory system via our cloud-based software, ControlPort. Built by us, ControlPort is an award-winning piece of fulfilment software that provides you with real-time updates on inventories across multiple brands and channels, and much, much more.

We designed the platform for anyone to use with ease, and we’ve baked in an inventory management software, a warehouse management system, and a courier management system into one package. Our tech team stays ahead of the trend to ensure ControlPort remains one of the best fulfilment platforms on the market.

If you’d like to see ControlPort in action, don’t hesitate to book a demo.