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Perpetual versus Periodic Inventory Systems

Inventory systems are in place to keep track of what product can be found in the warehouse, in the facility to sell and what has been sold needs to be restocked. The accountant and management all need inventory information, which must be presented in a structured format that is easy to understand and track. The two types of inventory systems covered in this discussion are perpetual and periodic. "The periodic review system is designed to place an order only when on-hand inventory information is available and the supplier is willing to deliver, in other words, when the order window is open" (Vonderembse & White, 2013, section 10.2, para 5).

• The inventory in storage can be counted physically from time to time, comparing the inventory on-hand and matching it to sales receipts and purchasing requisitions. It is time-consuming but does not require an influx of capital to implement this system. And the other system covered in the text by Vonderembse & White, (2013), is the perpetual inventory system, this is seen each time you go to a store and see a scanner read a bar code, it is a continuous review system where the inventory transaction is recorded as they occur. (Section 10.2, para 3).

• Both systems are used in businesses that are large or small, however, the expense to implement the perpetual inventory system does limit the business using it. The Perpetual inventory system has many elements that interact with each other that make up a Pont of Sale (POS) system. The info is transmitted instantly when a product is sold, alerting that more stock needs to be fronted on the shelves and reordered. Some examples of businesses using this Walmart, Best Buy, Target, Kohl's, for example, are on this inventory system. The only bad part of this is the shoplifting aspect. There is no record of the amount that walks out the door without payment. Then the periodic system comes into play in some aspects. Physical counts sometimes referred to as cycle counts are executed to verify the inventories. This aspect is part of the MRP system we have been discussing.

• The perpetual inventory system is better for a large organization with numerous products sold because it tracks immediately and allows a faster restocking, ensuring that the customer will be able to purchase the item all the time. However, for small businesses with only a few products sold, the less expensive inventory system to use is periodic. Small boutiques use this method to restock. The periodic inventory system can be used in small storage areas to display the product and it is easy to see what is needed for restock quickly.

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Question 1: Describe the perpetual and the periodic inventory systems. How are they different? Are there circumstances in which one system is better than the other? Include real-life examples.

• The perpetual inventory system is always monitoring inventory levels. This is the reason why it is also known as the continuous review system (Vonderembse & White, 2013). Essentially this system records every inventory movement. For a smaller operation this may be complete manually, but in most cases a software system is most likely utilized. For my organization, we utilize this type of inventory system. Every product and location has a bar code. As customer orders are filled, either the product or location bar code is scanned. That in turn creates an inventory transaction. We process thousands of these per day. We could not track inventory without this system in place.

• Next is the periodic inventory system. This is also called the fixed order interval system, which can be managed manually, "but it is more likely to run out of stock because the system is unable to react quickly to changes in demand because inventory level is not continually monitored," (Vonderembse & White, 2013, Chap. 10.2). In other words, this system has a set standard for interval ordering. By taking inventory levels more often, it will not change the ordering or delivery schedule. This system seems to work for businesses that deal in bulk product. Our text looks at a cement company and gas station as examples. After doing some research, it seems that many retail type businesses use this system. One example is a grocery store where they, "save on labor costs by making periodic adjustments of inventory," (Kelly, 2017). Essentially they are selling many small goods and it is not financially sound to continuously track inventory.