What Are the Key Differences in Periodic vs Perpetual Inventory Systems?
Traditionally, small businesses or those with steady, predictable demand and volume have used periodic inventory. In contrast, operations with higher demand volatility, seasonality, and other unpredictable variables have relied upon perpetual inventory keeping. Yet, there are a few more critical differences in periodic vs. perpetual inventory that should be noted:
In perpetual inventory, inventory is updated per sale, and the COGS account is too. In periodic inventory, the COGS account entry is done as a lump sum adjustment and isn’t created until inventory is counted. The distinction means that companies needing a regular or daily COGS will use perpetual accounting. Some companies may use cycle counting as a stop-gap between periods to “true-up” the counts, but it’s still less accurate than perpetual.
Periodic inventory can add labor costs to inventory keeping. A full or partial shutdown of operations is required to conduct the count as WIP inventory is part of the mix. This exercise is a significant and disruptive event for many companies. It also requires large numbers of people trained on the system and involves data entry and reconciliation after the count is conducted. Perpetual inventory is data and computer-driven and requires less labor and no shutdown to conduct.
Because perpetual inventory is computerized, it can be tied to the manufacturing bill of materials (BOM). Line-item inventory accounting is available for each material purchased, making purchase strategies more accurate. In periodic inventory, line-item accounting of raw materials may not be used or may be used only with additional labor and data entry. This method makes periodic inventory less accurate from a purchasing perspective.
If an inventory error is made in periodic systems, it may take weeks or months to find the error, and the cause may never be determined. This makes inventory process improvement difficult. Because transactions are automated and detailed to the unit level in perpetual systems, errors can quickly be uncovered and improvement methods swiftly implemented.
How Software Can Work for Your Inventory
Perpetual inventory accounting requires an investment in digital technology and software platforms that were out of reach for many companies in the past. This meant businesses that could have used perpetual inventory or sorely needed to were stuck using periodic measurements that adversely impacted long-term and medium-term business decisions over time.
But the power of smart manufacturing technology changes all that. Modern ERP, SCP, IIoT, and MES systems understand the critical importance of inventory. After all, why rely on time-lagged, legacy periodic systems when the right software lets you build real-time, automatic inventory data into your business decisions?
The solutions in the Plex Smart Manufacturing Platform were built around that very concept. If you’re ready to move to a perpetual inventory system where inventory control becomes part of the end-to-end visibility of your production environment, contact us today.