If thinking about your annual stock take makes you shudder in fear, it’s time to make a change to your inventory management practices.
Rather than dreading cycle counts, all the big retailers (Amazon included) use perpetual inventory management to stay on top of their stock.
Whether you’re scaling up your eCommerce business, selling through multiple sales channels, updating your systems, or onboarding new hires, now is the perfect time to restructure your inventory.
Make the switch from periodic to perpetual inventory management to turn your stock counts into an efficient operation that supports your store’s growth.
Perpetual inventory management defined and how it can help your business
You might have heard of perpetual inventory being referred to as cycle counting. Whichever term you use, the premise remains the same: Perpetual inventory management focuses on performing a continual stock count.
Sounds exhausting? It’s actually the opposite — performing cycle counts simplifies and cuts down on taking inventory.
In perpetual inventory management, you update stock records every time an item is purchased or sold. With perpetual inventory software, these stock updates occur automatically so you have an accurate running count of your inventory without needing to make manual adjustments after every order.
Periodic vs. perpetual inventory
The main difference between periodic and perpetual inventory is how often stock counts occur.
Periodic inventory management relies on occasional physical stock counts to determine the total physical inventory levels and the cost of goods sold. This count usually takes place annually and requires a count of all physical stock at one time. Because it’s infrequent, periodic inventory doesn’t provide real-time insight into your current inventory figures.
With perpetual inventory management, inventory counting happens constantly with the help of software and integrations. Every time an inventory item is purchased, sold, or moved, the inventory count is automatically updated. As such, you’ll always have an up-to-date count of your current physical inventory levels and the cost of goods sold.
Another notable difference between the two is how they impact business operations. Under periodic inventory, all business operations come to a grinding halt. No product can be moved, sold, or purchased while conducting a periodic inventory count.
On the other hand, perpetual inventory management doesn’t hinder business operations. Your eCommerce store can operate as usual when inventory is continually counted using the perpetual management method.
Thanks to perpetual inventory management, you’ll:
- Recoup time thanks to automating aspects of inventory management
- Have access to real-time accurate inventory insights at all times
- Avoid having to close operations for large-scale stock counts
You’ll still need to run the occasional full inventory count when cycle counting, but the perpetual method makes this far easier than periodic inventory management.
If your eCommerce business stocks more products than you can easily keep track of, change your inventory management strategy to perpetual inventory management.
How perpetual inventory management works
Perpetual inventory management automatically records inventory changes in real time by connecting inventory management software with point-of-sale (PoS) systems and barcode or RFID scanners.
Here’s a brief insight into how perpetual inventory management works.
1) Monitors and updates inventory changes in real time
Whenever an inventory item is sold, the PoS system will automatically connect with the inventory management system to update the inventory count for that item. Using barcoding or RFID tracking assigns unique IDs to all your SKUs to help automate this process.
Similarly, any new goods received will be automatically added to the inventory, and inventory levels will then be updated across any applicable internal systems or sales channels.
2) Automatically adjusts the cost of goods sold
When an inventory item is updated, so will the cost of goods sold (COGS). You’re free to choose how to calculate COGS, be it first-in-first-out (FIFO), last-in-first-out (LIFO), or using an average calculating method.
3) Adjusts reorder points
Inventory reorder points are the minimum quantity your stock reaches before it must be replenished. A perpetual inventory management system collects data whenever inventory items move and uses it to update the reorder points. This automatic adjustment ensures you won’t run out of stock.
4) Generates purchase orders
Based on the new reorder points, the perpetual inventory management system will generate any necessary purchase orders. By automating purchase orders, inventory is always appropriately stocked without having to create and send purchase orders to suppliers manually.
5) Integrates received inventory items
Just as inventory databases take note when stock leaves the warehouse, the inventory system will also update databases when new items are received. Whenever warehousing employees scan fresh inventory to add to their warehouse management system, it also alerts the inventory management system and connected databases. As such, the total available inventory always remains current.
Perpetual inventory management benefits everyone in your eCommerce business: Salespeople can provide accurate shipping information, stock levels, and current wholesale prices; marketing teams are able to see product demand and adjust the marketing messaging accordingly; customer service teams can better assist shoppers based on inventory insights; and finance teams receive accurate inventory costs and levels.
LIFO vs. FIFO perpetual inventory
In perpetual inventory management, there are several ways to calculate the COGS. Businesses will typically use either last-in-first-out (LIFO) or first-in-first-out (FIFO), but they may also use a weighted-average cost.
The LIFO method of pricing inventory bases the COGS on the most recent wholesale purchase price. In contrast, the FIFO method uses the oldest wholesale purchase point to calculate the COGS.
The weighted-average method of calculating COGS divides the cost of available goods by the number of units available.
Every business uses their preferred method, so choose the model that works best for your eCommerce store.
Step-by-step guide for switching to perpetual inventory management
Switching from periodic inventory management to perpetual management can be a seamless transition. Follow these step-by-step instructions to learn how you can effectively implement perpetual inventory management.
1) Get everyone on board with the change
As with most business operations, if you want a change to run smoothly, you need to gain buy-in from everyone.
Your inventory management system will benefit everyone in the business, so having them on board from the start will make implementation easier. Speak to everyone from warehouse to finance, sales to marketing, and any other relevant departments to let them know about the change and why you’re making it.
Keep everyone in the loop and educate them on the benefits of changing to cycle counting. Let employees get involved with the implementation and offer them the chance to provide feedback so they’ll remain open-minded to this new adjustment.
2) Choose software that meets your needs
Merchants have an abundance of choice when it comes to inventory management software, each one with various features, integrations, and costs. But the right inventory management software for your business will depend on its unique requirements.
For example, Orderhive is an affordable inventory management system with many advanced features and integrations. With it, you can perpetually manage inventory, as well as automate various order management, shipment, warehousing, and eCommerce tasks. This makes it a powerful perpetual inventory management software for eCommerce businesses looking for an all-in-one solution.
Do your research and find the software that best suits your operational needs, forecasted growth, and industry.
3) Ensure stock is identifiable and trackable
Developing an inventory tracking system will help ensure smooth sailing for your perpetual inventory management. Use barcodes or RFID tracking to keep stock identifiable and trackable throughout its journey, from first being booked in the warehouse to being sold to a customer.
Implementing barcodes or RFID tracking supports the automation of perpetual inventory by providing real-time inventory updates whenever products are scanned in or out of stock.
4) Set a cycle count schedule
Perpetual inventory management simplifies the task of regularly counting stock, rather than relying on annual takes. To maximize the success of your perpetual inventory system, set a cycle count schedule.
This schedule will help you stay accountable for your inventory goals and build a habit of ensuring inventory accuracy. A 13-week cycle count is the most commonly recommended frequency, as it allows you to conduct four full counts each year.
Unlike periodic stock counts that require the numbering of all inventory items, these cycle counts are partial stock tallies that count some inventory items continuously. For example, in week one, you count all stock in one area of your warehouse, then leave it alone until week 14. By the end of each 13-week cycle, you’ll have a full count of all physical inventory.
Cycle counting is more efficient than periodic counts because it allows your business to continue to operate as normal during the process. Choose a cycle count frequency that works best for your inventory levels and team size.
5) Start with smaller SKUs
Transitioning from periodic to perpetual inventory management can seem like a behemoth task, but you can ease the headache by starting small.
Begin migrating your inventory to perpetual slowly rather than trying to move everything over at once. I recommend starting with SKUs that are less frequently purchased or that have lower stock levels. This will allow you to transition most of your stock easily before moving on to the most popular or most stocked items.
Breaking the transition down into smaller steps will minimize the disruption to current business operations.
6) Close out any open inventory transactions
If you use a periodic inventory system, you’re already aware of the need to close out any open inventory transactions prior to performing a stock count.
The same applies when switching to perpetual inventory: Reconcile any open transactions before moving a set of SKUs over to the perpetual inventory system. Also check that those SKUs aren’t waiting on restocks. If they are, ensure the new stock is booked in immediately so they can be included in the count.
Closing any open inventory transactions before moving to perpetual inventory will minimize the risk of stock inaccuracies.
When to use perpetual inventory management
Before upheaving your entire supply chain processes, first understand when you should switch to perpetual inventory management.
If your eCommerce store is in its infancy and only holds a small amount of stock at any given time, perpetual inventory management will likely be unhelpful for you. But, if you have more stock than you can easily count at once or are experiencing any kind of business shift or expansion, perpetual inventory management may be the best solution for you.
Here are some examples of when to consider transitioning to a perpetual inventory management strategy.
Growing your team
Onboarding new employees is an exciting step in a business and may present the perfect opportunity to switch to perpetual inventory. You could roll the training for the new inventory system into the onboarding experience to ensure all employees (old and new) are up to speed on the new inventory system before getting started.
Or, say you hire additional employees to cover an expansion into a new product category. You could tie in the schedule for switching to perpetual inventory management with your planned time frame to onboard the new employees; when your new team members start their first day on the job, you can roll perpetual inventory training into their onboarding schedule.
Switching to perpetual inventory while growing your team prevents you from having to train employees in multiple inventory management systems. Save yourself the hassle by switching to perpetual inventory as part of your onboarding process.
Updating your technology and systems
Ecommerce businesses go through many changes, including numerous technology and system updates. These upgrades could signify it’s time to switch to perpetual inventory management.
For example, if you’re overhauling your financing system, it might be a good idea to look at how the new system could integrate with perpetual inventory software. Simultaneously updating these systems will produce a well-rounded tech stack that works together harmoniously.
Scaling your business
Periodic inventory systems work best for retailers with low inventory levels or small order volumes. As order volumes and inventory levels increase, you might quickly outgrow the periodic inventory system.
Switching to perpetual inventory management will allow your business operations to scale as your store does. To illustrate, a perpetual inventory system will help you manage stock across multiple warehouse locations if you decide to take your eCommerce store globally. You can spread stock between various warehousing facilities while using perpetual inventory management to gain real-time inventory insights.
Selling through multiple marketplaces and sales channels
The logical next step when selling products online is to increase the number of sales channels and marketplaces you sell through. However, managing multiple platforms is a delicate balancing act.
While previously you managed stock on one website, you now need to oversee inventory levels, product updates, orders, restocks, and queries for multiple channels. A perpetual inventory system can plug all your sales channels into one platform to manage them all. This will reduce your workload, minimize redundancies, and ensure all your sales channels maintain accurate stock counts.
Wrapping up — Switch to perpetual inventory management
Adopting perpetual inventory management could be the answer to all (or most of) your eCommerce inventory challenges.
It can improve the efficiency of your business operations while constantly providing you with up-to-date insights into your inventory performance. Combine perpetual inventory management with frequent cycle counts to get the most out of your management processes.
The automated nature of perpetual inventory means you’ll streamline business operations, minimize human error, and free up time and resources to refine other areas of your business. If your business is experiencing or is due to go through any level of growth, it’ll benefit from switching to perpetual inventory management.