Any manufacturing manager would love to be able to utilize a perpetual-inventory
system. And with recent advancements with software, the affordability of systems that support perpetual-inventory systems is in reach for most. What does this mean? Even smaller manufacturing companies (sales of $7 million or less) can adopt robust inventory systems that will produce significant savings.
As you know, periodic inventory systems are a time-specific method of calculating inventory whereby the goods-on-hand are counted at regular intervals (weekly, monthly, quarterly). The difference between the beginning balance and the ending balance is the change in inventory, which is applied as cost of goods sold.
A perpetual system tracks goods (in real time) as they are added or removed from the business’ inventory. Perpetual inventory systems also can track work-in-progress (WIP).
The advantages of a perpetual inventory system are many. Companies are always aware of the quantity of goods-on-hand, both in production and available for sale. Managers can readily tell customers if goods are available. They can track transactions at the individual-item level.
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Periodic systems cannot produce the same results, leaving business owners without important data (such as cost of goods sold) until the end of the following counting period. The lack of real-time data can hinder business decisions not only for production planning, but also the relative profitability of individual products, customers, segments, divisions, etc. This cannot be measured directly with a periodic-inventory system
The benefits sound great! The software is affordable!
Yes. Yes. But there is a downside to perpetual-inventory systems—they require investments not only in software but also in process and people. Perpetual systems are data driven. Rules pertaining to this data must be communicated to all personnel and followed in sequence. I’ve seen inventory systems bring organizations to their knees because organizations didn’t have the right vision, processes and people to implement and execute. The process seemed too challenging. Management lacked the know-how and discipline to push this change across the finish line.
At the end of the day, this software is a merely a tool, not a solution or a magic bullet.
Perpetual systems are a “must have” to optimize the investments in inventory and productive capacity. But, again, the software is just one element. Managers must set reasonable time/money budgets to realize significant organizational benefits. When implemented properly, the end result can be a cost-effective, analytic-drive solution to optimizing inventory investment that enables businesses to focus efforts on what matters most: growth in a dynamic, competitive economy.
Scott Palka is partner and consulting CFO for Pro Back Office.