Until recently, small businesses were doomed to take periodic inventories – those laborious once-a-week, once-a-month or even once-a-year manual count of what is in stock. Now the tools exist for small businesses to keep a perpetual inventory; this is the real-time count that larger businesses use, which provides a real-time understanding of profit, and a better ability to avoid overstocks and stock-outs. The tools are as sophisticated as a dedicated software system, or as simple as using the inventory control feature of a program like Quicken Small Business.
The perpetual system of inventory management takes a real-time inventory count. It updates that count whenever an inventory item is sold or consumed. That inventory may be raw material, or work in process, or finished goods. At a retailer, that inventory is the finished goods in storage or on the shelves. At an automobile dealership, that inventory includes the cars, but also any parts in its service area, which will be consumed. A company may maintain a separate asset inventory, for goods that it does not sell to a consumer (for example, the tools in a machine shop).
The perpetual system of inventory can be automated, thus saving the expenses of labor, overtime and business interruption. The American Apparel store at Columbia University in New York claimed to have saved 60 hours per month, through automated perpetual inventory counts. Over time, the business can develop an understanding of optimal inventory – what is enough, what is too much. A real-time understanding of inventory enables the business to set realistic min/max parameters for inventory; once the inventory goes below a minimum, the business replenishes that inventory. If the inventory exceeds a maximum, the business may put further orders or production on hold, until that excess inventory is consumed.
A key tool in perpetual inventory is some kind of automated identification, or auto-ID, like bar codes or radio frequency identification (RFID). The American Apparel store used RFID tags on its clothing items. Another retailer may simply rely upon bar codes and scanners – a more manual tool than RFID, but still accurate. For a retailer, a point-of-sale software system informs the business what inventory has been diminished. A more sophisticated small business may invest in an application like SAP’s Business One Software, while a very small business can likely get by with the inventory capabilities in a Quicken or QuickBooks.
Considerations and Exceptions
A business such as a retailer will simply lose inventory through misplacement, mis-ships and theft, which a simple point-of-sale inventory count will not catch. A business like a restaurant, with constant consumption and a steady stream of suppliers, is better off “eyeballing” its inventory and placing orders as supplies dwindle. This physical form of inventory is perfectly effective, while an automated inventory system would cost more in time and money to implement than it would return.