How Moving to a Perpetual Inventory System Benefits a Retail Business?

Managing inventory is one of the most critical aspects of running a successful retail business. It is the backbone of retail operations, ensuring that customers get what they want, when they want it, while the business remains profitable. Historically, retail businesses relied on a periodic inventory system, which required physical counts of inventory at set intervals (typically annually or semi-annually) to update the general ledger and calculate stock levels. While functional, this system came with several drawbacks, such as inaccuracies, time lags, and labour-intensive processes.

However, the rise of the perpetual inventory system has revolutionised inventory management for retailers, offering a more dynamic, accurate, and real-time solution. Perpetual inventory continuously updates stock levels as transactions occur, providing an up-to-date view of inventory without the need for manual intervention. This shift from periodic to perpetual inventory management brings a host of benefits to retail businesses, enhancing everything from operational efficiency to customer satisfaction.

What is a Perpetual Inventory System?

A perpetual inventory system is an automated method of tracking stock levels, sales, and product movement in real-time. Every time a transaction occurs—whether it's a sale, purchase, or return—the system instantly updates the inventory count. This contrasts with periodic systems, where inventory levels are only adjusted during physical counts at predetermined times.

In perpetual inventory, data is automatically fed into the system through Point of Sale (POS) software, barcode scanning, or Radio Frequency Identification (RFID) technology. This real-time approach provides businesses with a clear and accurate view of their inventory at any given moment, allowing for better decision-making and more efficient operations.

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How Does a Perpetual Inventory System Work?

Step 1: Inventory is Immediately Updated by the Point of Sale (POS) Software

Whenever an item is sold, the perpetual inventory system integrated with the POS software instantly updates the inventory levels. For instance, as soon as a product is scanned at checkout or through an online transaction, the system deducts that item from the total available stock. This is made possible with tools like barcode readers and RFID scanners, which ensure speed and accuracy.

Step 2: Related Records Like Cost of Goods Sold (COGS) are Updated Automatically

The perpetual inventory system doesn't just update stock levels; it also recalculates related financial metrics like the cost of goods sold (COGS). Each time an item is sold or received, the system automatically adjusts COGS, providing real-time insights into profitability and financial performance.

Step 3: Automatic Reorder Points and Adjustments Based on Sales Trends

Using historical sales data and trends, a perpetual inventory system calculates optimal reorder points. This ensures that stock levels are maintained at the ideal level, preventing both overstock and stockouts. As sales fluctuate, the system continuously adjusts reorder points to meet current demand.

Step 4: Automated Purchase Orders for Low Stock Levels

When stock levels for a particular product reach the preset reorder point, the perpetual inventory system automatically generates and sends a purchase order to the supplier. This eliminates the need for manual stock monitoring and reordering, saving time and reducing the risk of human error.

Step 5: Supplier-Delivered Products Are Logged in the System Upon Receipt

Once a supplier delivers products, the items are scanned into the system and immediately become available for sale. This seamless integration of warehouse management ensures that stock levels are updated instantly, allowing for faster processing of customer orders and minimising delays.

Advantages of Perpetual Inventory

The perpetual inventory system offers numerous advantages that benefit retail businesses of all sizes, particularly in today’s fast-paced, omnichannel retail environment. Here are some of the key benefits:

1. Real-Time Inventory Tracking

The biggest advantage of perpetual inventory is real-time tracking. Every transaction is recorded and inventory levels are adjusted instantly. This allows retailers to have an accurate and up-to-date picture of their stock at all times. Real-time inventory tracking is particularly beneficial for businesses with high turnover rates, such as grocery stores, apparel retailers, and e-commerce businesses.

Advantages of Real-Time Tracking:

• Minimises the risk of stockouts or overstock situations.
• Enhances the accuracy of inventory reporting.
• Reduces the need for manual counts and interventions.
• Helps provide better customer service by ensuring popular items are always in stock.

2. Improved Data Accuracy and Decision-Making

Perpetual inventory eliminates many of the inaccuracies that arise from manual stock counts and periodic inventory systems. This accuracy is crucial for making informed decisions about purchasing, pricing, and promotions. When business owners and managers have access to precise data, they can make better decisions about inventory replenishment, product assortment, and pricing strategies.

Benefits of Accurate Data:

• Reduces the likelihood of costly errors such as overordering or underordering.
• Provides insights into product performance and customer preferences.
• Improves the effectiveness of demand forecasting and planning.

3. Better Control Over Inventory Costs

One of the most significant challenges for retailers is managing the cost of holding inventory. Overstocking can lead to excess inventory costs, while understocking can result in lost sales and unhappy customers. A perpetual inventory system helps businesses strike the right balance by keeping inventory levels aligned with real-time sales patterns.

Cost-Management Benefits:

• Reduces inventory carrying costs by maintaining optimal stock levels.
• Prevents excess stock from becoming obsolete or spoiling (especially important for perishable goods).
• Decreases the cost of manual labour associated with physical counts.

4. Automatic Replenishment and Streamlined Supply Chain Management

A perpetual inventory system automates the reordering process by generating purchase orders when stock levels reach a specified threshold. This not only saves time but also streamlines the entire supply chain process, from ordering to fulfilment. Retailers can maintain better relationships with suppliers by consistently placing accurate orders on time.

Supply Chain Benefits:

• Prevents stock outs by triggering timely reorders.
• Reduces the workload for staff who would otherwise be manually tracking and reordering stock.
• Streamlines communication with suppliers and reduces lead times.

5. Reduced Labour Costs

With manual inventory processes, businesses need to allocate significant resources to stock counts, order management, and inventory adjustments. A perpetual inventory system automates many of these tasks, reducing the need for manual labour. This can result in substantial savings, especially for larger retailers with extensive inventories.

Labour Cost Benefits:

• Frees up staff time for higher-value tasks such as customer service and sales.
• Reduces errors caused by manual input or physical counts.
• Lowers the costs associated with seasonal or periodic inventory audits.

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6. Accurate Financial Reporting

Because a perpetual inventory system continuously updates stock levels, COGS, and other financial metrics, it provides a more accurate reflection of a business’s financial health at any given time. This real-time financial data is invaluable for creating budgets, financial forecasts, and profit analysis.

Financial Benefits:

• Provides accurate and timely financial reports for year-end accounting and tax preparation.
• Offers insights into product margins and overall profitability.
• Enhances the accuracy of profit and loss statements.

7. Enhanced Customer Satisfaction

A key factor in customer satisfaction is product availability. When customers find that the items they want are consistently available, it builds trust and loyalty. A perpetual inventory system ensures that popular items are always in stock, and it can even alert retailers to trends in customer preferences, allowing them to adjust stock levels accordingly.

Customer Satisfaction Benefits:

• Reduces the frustration of stockouts.
• Improves the overall shopping experience.
• Increases customer loyalty by ensuring that products are available when needed.

 8. Better Insights into Market Trends and Consumer Behavior

The data collected by a perpetual inventory system offers valuable insights into consumer buying patterns and market trends. Retailers can analyse this data to identify top-selling products, seasonal trends, and customer preferences. These insights can be used to optimise product offerings, adjust marketing strategies, and plan future inventory investments.

Market Insight Benefits:

• Helps retailers stay ahead of market trends and adjust product assortments accordingly.
• Provides data to support marketing and promotional strategies.
• Enables more accurate demand forecasting and inventory planning.

9. Seamless Integration with E-Commerce Platforms

In today’s omnichannel retail environment, many retailers operate both brick-and-mortar stores and online stores. A perpetual inventory system ensures that inventory levels are synchronised across all channels, providing customers with a seamless shopping experience whether they purchase in-store or online.

E-Commerce Integration Benefits:

• Ensures that inventory levels are consistent across all sales channels.
• Reduces the risk of overselling or underselling products online.
• Streamlines order fulfilment for online orders.

The Future of Perpetual Inventory in Retail

As the retail industry continues to evolve, perpetual inventory systems will play an increasingly important role in helping businesses remain competitive. The shift toward automation and real-time data will allow retailers to operate more efficiently, reduce costs, and enhance customer satisfaction. Additionally, as technology advances, we can expect perpetual inventory systems to become even more sophisticated, with features like AI-driven demand forecasting, advanced analytics, and enhanced integrations with supply chain partners.

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Why Retailers Should Move to a Perpetual Inventory System

For any retail business, transitioning to a perpetual inventory system is not just a technological upgrade; it’s a strategic move that offers long-term benefits. From real-time tracking and accurate financial reporting to reduced labour costs and enhanced customer satisfaction, the advantages of perpetual inventory far outweigh those of the traditional periodic system. Retailers that adopt this modern approach to inventory management will be better positioned to meet the challenges of today’s fast-paced retail environment and thrive in the future.

Whether you’re a small retailer looking to scale or a large chain seeking efficiency, perpetual inventory can help you streamline operations, reduce costs, and deliver an exceptional shopping experience for your customers. 

Are you ready to make the switch? Get in touch with Ginesys today!