What are the Different Types of Inventory Management Systems?

Tally Solutions |Updated on: September 29, 2023

Maintenance of a sound and healthy supply chain is imperative for a business’ smooth functioning and constant growth. Since it is an extremely difficult task to keep your inventory at optimum levels at all times, business owners need a solid inventory management strategy to manage the health of a successful supply chain. This will have a huge impact on how the business in question operates on a daily basis. With the ever-changing business environment and numerous types of inventory management systems available in the market, it becomes rather daunting to choose the best fit for your business.

Different industries deal with different types of inventory that inform how their operations work. Once you choose the system in which you want to manage your inventory, inventory management software will help you further simplify your business operations.

Businesses can choose from either of the three inventory systems: manual, periodic, and perpetual. Let’s take a look at each one of these systems and find out how they are different from one another.

Manual inventory management system

Before the advent of technology, almost all accounting activities were managed manually, and it was the same to manage inventory levels. To track inventory manually, items would be counted manually, which obviously was prone to errors. Although a lot of businesses have shifted towards automation, still there are a set of small businesses that carry low levels of inventory and so they stick to using the manual method of tracking inventory. Typically, the process starts with an employee scanning through a checklist of the items, counting each one of them, noting down the results, and entering the data in a spreadsheet. Now this crucial information, without being cross-checked by an automated system is used to take all the inventory-related decisions.

Periodic inventory management system

The periodic inventory management system is a perfect bridge between manual and perpetual inventory systems. This method of tracking inventory gives room for employees to adopt both methods at their convenience. When using a periodic inventory management system, you take physical counts of your inventory only periodically, which could be; monthly, weekly, or yearly, depending on your business. This system works well for businesses that maintain lower inventory levels and only stock a limited number of sellable products.

However, a major challenge that business owners may face while using a periodic inventory management system is that this method doesn’t track inventory on an item-by-item or transaction-by-transaction basis. It is tedious and almost impossible to identify various accounting errors when they occur, and you can’t track product movement accurately as compared to a perpetual system. But most importantly, periodic systems make it harder to accurately calculate your cost of goods sold (COGS).

Perpetual inventory management system

This inventory management system is the best proven method to keep a close track of your inventory without any errors. A perpetual inventory management system tracks cost and stock levels on a transaction-by-transaction basis, perpetually updating costs associated with each item at every phase in the product life cycle. This system uses digital technology to track inventory in real-time and update purchases and return transactions on a regular basis, accurately. With a perpetual inventory system in place, you can easily identify the slow-moving stocks, and storage locations of various stock items, and maintain optimum reorder levels so that you are never understocked or overstocked.

With a perpetual system in place, business owners will be able to make timely and accurate decisions that are crucial to their business growth and profitability. Having more accurate tracking of inventory levels also provides a better way of monitoring problems such as theft.

Businesses that deal with high sales volume and a variety of stock/inventory mostly opt for a perpetual inventory management system. Handling of real-time complexities and demands becomes much more seamless and easier with an automated inventory management software in place. With TallyPrime’s unmatched and intuitive capabilities, tracking inventory in your business, from purchase orders to sales will be as easy as it can get. Inventory tracking covers stock changes due to purchase and sales processes, delivery or receipt as samples, movements across godowns, all adjustment entries including those caused by physical verification, and so on.

Want to know more about TallyPrime’s inventory management features and how they will benefit your business? Take a free trial right away and be amazed!

FAQ: 

What are the main inventory management systems?

There are three types of inventory management system: manual, periodic, and perpetual.

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