Periodic Inventory System: What is it?

A periodic inventory system is software that enables companies to conduct periodic physical counts of their stock. 

Initially, the company may perform a physical review of its goods and import the stock data into the software for reconciliation. 

These software systems support a variety of stock-keeping methods, allowing users to obtain inventory lists in paper format and import stock data for calculating inventory order needs and reconciliation for a new period. 

The resulting figures and reports can be exported to accounting software. The selection of inventory software is determined by a company’s specific requirements and product needs.

When to Use it?

A small company with a limited number of stock-keeping units (SKUs) may utilize a periodic system when scalability is not a concern. Additionally, a periodic system can be used in conjunction with a perpetual system based on the nature of the products and business needs.

Since no additional equipment or coding is required, any business can utilize a periodic system, resulting in lower implementation and maintenance costs. 

Moreover, simple inventory counts can be conducted by trained staff when time is limited or there is high employee turnover.

A periodic system is appropriate for businesses with a well-established supply chain process, a limited range of products, and close monitoring of goods. 

However, it may not be suitable for identifying missing inventory or reconciling discrepancies, which can become more challenging to manage as a business expands.

Benefits of Periodic Inventory System

The primary advantages of using a periodic inventory system are its implementation, lower cost, and reduced staffing requirements. 

Incorporating a periodic system into a business requires not much time and effort. Simple manual counts on paper may be adequate for collecting product data, particularly if the number of goods sold is limited. 

For small businesses, conducting a basic count once a day or week is usually sufficient to keep track of inventory. This is much cheaper than integrating a computer system that manages your inventory at all times.

Disadvantages of Periodic Inventory System

1. Unknown Stock Levels

In a periodic inventory system, inventory is not continuously monitored or tracked in real-time. Instead, it is assessed periodically, usually on a monthly or quarterly basis, through physical inventory counts.

This infrequent monitoring leaves a gap in time where changes in inventory, such as theft, damage, misplaced items, or exchanges of defective products, can occur without immediate detection until the next inventory count. The lack of regular tracking and real-time visibility makes it difficult to promptly identify and address these issues.

2. Possible Revenue Loss

In a periodic inventory system, it can be challenging to detect inventory shrinkage caused by theft, damage, or misplaced items due to employee error. It is also possible for losses resulting from defective products being exchanged to go unnoticed. 

When we lack knowledge about warehouse operations, we expose ourselves to potential revenue losses that are hard to identify without closely tracking current inventory levels and monitoring the inflow and outflow of items.

3. Lack of Detail

Infrequent determination of inventory levels, typically on an annual basis, can lead to errors and missed opportunities. 

For instance, conducting inventory checks only once a year results in a lack of detailed information, making it challenging to identify and reduce factors that contribute to inventory costs, such as shipping, purchasing, and handling expenses. 

Additionally, due to the lack of detail, potential opportunities like seasonal increases in demand may go unnoticed.